Net operating income over price
The cap rate is a property's annual return if you bought it in cash. NOI is the rent left after operating costs, before any loan. Divide it by the price and you get a percentage that lets you compare very different buildings on one scale. Note what it leaves out: mortgage payments and future appreciation.
NOI is the number people get wrong
- Include property taxes, insurance, maintenance, management fees, utilities the landlord pays, HOA dues and a vacancy reserve of roughly 5 to 10 percent.
- Exclude mortgage payments, loan principal and major capital projects like a new roof. Those belong in a cash-flow or ROI analysis, not in NOI.
- Use real rent, the market or actual figure, not the best-case rent. Inflated income is the most common way a cap rate ends up too rosy.
Typical cap rates by property type
| Property type | Typical cap rate | Risk |
|---|---|---|
| Multifamily (2–4+ units) | 4.5–6.5% | Low to moderate |
| Single-family rental | 5–8% | Moderate |
| Industrial / warehouse | 5.5–7.5% | Low to moderate |
| Retail (shopping centers) | 5.5–8% | Moderate |
| Office | 6.5–8.5% | Moderate to high |
| Class C / secondary market | 7–10%+ | High |
Ranges reflect 2026 conditions and move with interest rates. When rates rise, cap rates tend to rise too, because buyers demand a higher return.
Cap rate vs ROI
Cap rate measures the property. ROI measures your money in it. They match only when you pay all cash. Add a loan and the cap rate holds while ROI can climb well above it, because your own cash outlay is a fraction of the price.
| Cap rate | Cash-on-cash ROI | |
|---|---|---|
| Base | NOI ÷ property value | Cash return ÷ cash invested |
| Financing | Ignored (all cash) | Includes loan payments |
| Best for | Comparing properties | Your actual return |
Cap rate is a snapshot at one moment. Pair it with cash flow and location before deciding, not on its own.
Common questions
What is the cap rate formula?
Cap rate is net operating income divided by property value, times 100. If a building nets 100,000 dollars a year and is worth 1.25 million, the cap rate is 8 percent.
What is a good cap rate?
It depends on risk. Roughly, 4 to 6 percent is low-risk stable income in prime markets, 6 to 8 percent is a balanced middle, and 8 percent or more pays you for extra risk in secondary markets. Compare only within the same property type and area.
Is a higher cap rate always better?
No. A high cap rate usually signals higher risk: older buildings, weaker locations or shakier tenants. A 5 percent cap in a prime market can be safer than a 10 percent cap in a rough one.
Does cap rate include the mortgage?
No. Cap rate assumes an all-cash purchase and ignores loan payments, which is what makes it useful for comparing properties. Cash-on-cash return and ROI are the metrics that account for financing.
