Glossary
Cap rate (capitalization rate)
Cap rate is a rental's yearly NOI divided by its price or value. It shows the return as if you bought the property with all cash.
Cap rate lets you compare rentals side by side without the loan getting in the way. A higher cap rate means more income per dollar of value, which often comes with more risk or a weaker location.
How to calculate it
Cap rate = NOI / price or value. Run The Deal shows two versions: cap rate on your all-in cost, and cap rate on the ARV.
- NOI
- $15,840 a year
- Value
- $200,000
If your all-in cost was $180,000 instead, the cap rate on cost is $15,840 / $180,000 = 8.8%. Buying below value raises your cap rate on cost.
Cap rate vs cash on cash
Cap rate ignores financing. Cash on cash return uses your actual cash flow after the mortgage and divides by the cash you put in. A deal can have a solid cap rate and weak cash on cash if the loan is expensive.
Common mistakes
- Using a pro forma NOI with low taxes or no vacancy.
- Comparing cap rates built different ways. Some include a capex reserve in NOI; Run The Deal does not.
- Treating cap rate as the whole story. It does not count appreciation, loan paydown or the cost of the rehab.
See both cap rates on your deal in the rental property calculator.
Questions
What is a good cap rate?
It depends on the market and the property. Run The Deal scores cap rate on cost of 7% as good and 5.5% as marginal by default. Those are planning targets, not a rule.
Does cap rate include the mortgage?
No. Cap rate uses NOI, which is before any loan payment.
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