Cap rate is a rental's net operating income (NOI) divided by its price, times 100. A good cap rate clears two bars: it sits well above the 10-year Treasury yield (4.84% as of November 5, 2026), and it comes close to what your loan costs each year, which was about 8.13% of the balance on a 30-year loan at 7.18% as of November 2026.
Key takeaways
- Cap rate equals NOI divided by purchase price, and NOI is the rent you collect minus operating costs, before any mortgage payment.
- Fixed ranges like "5% to 10%" don't tell you much, so compare your cap rate with the 10-year Treasury yield and with your own loan cost instead.
- Seller numbers often leave out vacancy, management and reserves, which is how a 7.05% deal can be marketed at about 9.3%.
- The U.S. rental vacancy rate was 7.6% in Q3 2026, ranging from 6.5% in suburbs to 9.2% in the South, so use a real vacancy rate instead of a default.
- When your cap rate is below your loan cost, borrowing lowers your return, and cash flow gets thin even on a decent-looking deal.
- You can work backward to a maximum price by dividing NOI by the cap rate you want.
How do you calculate cap rate?
Cap rate is the return a property would earn in a year if you paid all cash. The formula is:
Cap rate = NOI ÷ purchase price × 100
NOI (net operating income) is the rent you actually collect, minus the costs of running the property. It's measured before the mortgage, so two buyers with different loans get the same cap rate on the same building.
| Put in NOI | Leave out of NOI |
|---|---|
| Gross rent, minus vacancy | Mortgage principal and interest |
| Property tax | Depreciation |
| Insurance | Income taxes |
| Management fee (even if you self-manage) | Down payment and closing costs |
| Repairs and maintenance | |
| Capex reserve | |
| Owner-paid utilities and other costs |
We use two house rules. First, we always charge a management fee, even when you do the work yourself, because your time has a cost and a future buyer will add that fee anyway. Second, we put a capex reserve (roofs, HVAC, water heaters) inside NOI. Some investors keep it below the line, so when you compare cap rates with someone else, ask which way they did it.
Worked example: a $640,000 4-plex
Here's a full NOI build. Everything except vacancy is an example number, so swap in your own county tax bill, insurance quote and rents. Check the rents against local rental comps before you trust them.
Example 4-plex NOI (example inputs; vacancy from Census, Q3 2026)
| Line | Amount | Basis |
|---|---|---|
| Gross rent | $79,200 | $1,650 × 4 units × 12 months |
| Vacancy | -$6,019 | 7.6% national rate, Q3 2026 |
| Collected rent | $73,181 | |
| Property tax | $7,680 | 1.2% of price |
| Insurance | $4,800 | Example quote |
| Management | $5,854 | 8% of collected rent |
| Repairs | $5,123 | 7% of collected rent |
| Capex reserve | $1,200 | $300 per unit |
| Owner-paid utilities | $2,400 | Example |
| Other | $1,000 | Example |
| Total operating costs | $28,057 | 38% of collected rent |
| NOI | $45,124 | |
| Cap rate | 7.05% | $45,124 ÷ $640,000 |
The vacancy line comes from the Census Bureau's third-quarter 2026 vacancy report, which put the national rental vacancy rate at 7.6%, up from 7.1% a year earlier.
Why does the seller's cap rate look higher?
Listing sheets often show a "pro forma" built to sell the deal. Take the same 4-plex, drop vacancy, management and the capex reserve, and set repairs at 5% of gross rent ($3,960). Costs fall to $19,840, NOI jumps to $59,360, and the cap rate reads about 9.3%.
Watch out: Same building, same rents, and more than 2 points of cap rate comes from assumptions alone. Rebuild every seller's NOI with your own vacancy, management and reserve lines before you compare deals.
What is a good cap rate for a rental property?
Most guides quote a fixed range, often 5% to 10%. A range with no date can't tell you whether today's deal is good, because what you could earn elsewhere and what your loan costs both move. We use two tests.
Test 1: Does it beat the 10-year Treasury?
The 10-year Treasury is about as close to a risk-free return as you can get. It yielded 4.84% on November 5, 2026. Our 4-plex at 7.05% earns 2.21 points more, and that gap is your pay for vacancies, repairs, turnover and selling costs down the road. The thinner it gets, the less you're paid for the work of owning a building.
Cap rates don't always follow Treasuries step for step. CBRE's H1 2026 cap rate survey found the all-property average held about flat even as the 10-year yield rose, which means the gap between the two got smaller.
Test 2: Does it beat your loan cost?
This is the test that decides cash flow. Loan cost here means the full yearly payment (principal and interest) as a percent of the loan amount. Freddie Mac's average 30-year rate was 7.18% as of November 5, 2026. That survey tracks owner-occupied loans with 20% down and excellent credit, so treat it as a floor, since an investor loan likely costs more.
Put 25% down on the 4-plex ($160,000) and borrow $480,000 at 7.18% for 30 years. The payment is about $3,252 a month, or $39,020 a year. That's 8.13% of the loan, 1.08 points more than the 7.05% the building earns, so every borrowed dollar pulls your return down.
| Measure | Result | What it tells you |
|---|---|---|
| Cap rate | 7.05% | Return if you paid all cash |
| Cash flow after the loan | about $6,100 a year | $45,124 NOI minus $39,020 payment |
| Cash-on-cash return | 3.8% | Cash flow ÷ $160,000 down, before closing costs |
| DSCR | 1.16 | NOI ÷ yearly payment |
A DSCR of 1.16 means NOI covers the payment with 16% to spare. Our DSCR loan guide explains how lenders read that number.
The 7.05% cap rate turns into a 3.8% cash return, which is lower than the property earns with no loan at all. If you want to see what a solid cash return looks like, read our guide to good cash-on-cash returns.
If your cap rate is below your loan cost, the mortgage lowers your return instead of raising it.
How much does vacancy change the cap rate?
Many tools default to 5% vacancy, but Census data show the real rate depends a lot on where you buy. Here's the same 4-plex at different vacancy rates, with management and repairs moving with collected rent and everything else held the same.
| Vacancy rate | Where it comes from | Cap rate |
|---|---|---|
| 5.0% | Common default | 7.32% |
| 6.5% | Suburbs, Q3 2026 | 7.17% |
| 7.6% | U.S. average, Q3 2026 | 7.05% |
| 8.8% | Principal cities, Q3 2026 | 6.92% |
| 9.2% | South, Q3 2026 | 6.88% |
That's a 0.44-point swing from one input. Start with the rate for your kind of area, then adjust it using your own rent history or what nearby landlords report.
How do you use cap rate to set an offer price?
Flip the formula: Price = NOI ÷ target cap rate. With a realistic NOI of $45,124, here's what the 4-plex is worth at different cap rates:
| Target cap rate | Price |
|---|---|
| 5.5% | $820,431 |
| 6.0% | $752,061 |
| 6.5% | $694,210 |
| 7.0% | $644,624 |
| 7.5% | $601,649 |
Each half-point moves value by tens of thousands of dollars, and the swings get bigger at lower cap rates. Going from 6.0% to 6.5% takes about $58,000 off the price. This is also why padded seller numbers matter so much: run the seller's $59,360 NOI at 7.0% and you'd "justify" paying $848,000.
What about a single-family rental?
Same math, smaller numbers. Take a $300,000 house renting for $2,200 a month (example numbers). Costs are tax $3,600, insurance $1,800, management at 8%, repairs at 7%, a $1,200 capex reserve and $500 other.
| Line | Amount |
|---|---|
| Gross rent | $26,400 |
| Collected rent after 7.6% vacancy | $24,394 |
| Operating costs | $10,759 |
| NOI | $13,635 |
| Cap rate | 4.54% |
At 4.54%, this house earns 0.30 points less than the 10-year Treasury. With the same loan terms (25% down, 7.18%, 30 years), the yearly payment would be about $18,291, well above the NOI, for a DSCR of about 0.75. A buyer at this price is counting on appreciation or rent growth to make up the difference. That can be a choice you make on purpose, and the cap rate is how you know you're making it.
Should you use purchase price or current value?
At purchase, use the price you pay. Once you own the property, cap rate on your purchase price shows how the original deal is doing, while cap rate on today's value shows what your equity earns where it sits now.
The two drift apart as rents, costs and values change. If value rises faster than NOI, your cap rate on current value falls, which is a good prompt to check whether that equity still fits your plan.
Run your own numbers
Plug your own rent, vacancy, tax, insurance and reserve lines into our cap rate calculator. Use the 4-plex table above as a checklist so nothing gets left out, and don't forget to change the loan terms to the quote you actually have.
If you're screening lots of listings, Operator's Buy Box Agent does the first pass: it screens new listings in your markets overnight, pulls insurance estimates and rent comps, and runs cash flow at your financing terms. You start from your assumptions instead of the seller's pro forma.
Figures last updated November 10, 2026.
This is general information, not tax, legal or lending advice. Talk to your CPA, attorney or lender about your situation.
FAQ
Is a higher cap rate always better?
Not always. A higher cap rate means more income per dollar of price, but it can come with an older building, more vacancy or a weaker location. Compare deals only after you've rebuilt each NOI with the same assumptions.
Does cap rate include the mortgage?
No. Cap rate is measured before any loan payment, so it's the same however you finance. Use cash-on-cash return and DSCR to see what the loan does to your returns.
What is a good cap rate for a rental property right now?
As of November 2026, one that sits well above the 4.84% 10-year Treasury yield and gets close to your loan cost, which is about 8.13% of the balance at a 7.18% 30-year rate. A deal below both depends on rent growth or appreciation to work.
Should I use 5% vacancy in my cap rate math?
Only if your market supports it. The national rental vacancy rate was 7.6% in Q3 2026, and principal cities ran 8.8%. In our 4-plex example, moving from 5% to 7.6% vacancy dropped the cap rate from 7.32% to 7.05%.
Can I compare a house and a 4-plex by cap rate?
Yes, as long as both NOIs use the same lines and the same vacancy logic. In our examples the 4-plex came out at 7.05% and the house at 4.54%, so ask what you're getting for the lower rate, such as a market with less vacancy, before you treat the gap as good or bad.
