How cap rate is calculated
Cap rate = Net operating income ÷ Purchase price
Net operating income (NOI) is the rent you actually collect minus operating expenses: property taxes, insurance, maintenance, management, utilities you pay and HOA dues. Mortgage payments are not included, which is why cap rate lets you compare properties regardless of how they're financed.
Example
A $250,000 duplex rents for $2,200 a month. With 5% vacancy, collected rent is $25,080 a year. Subtract $9,000 of operating expenses and NOI is $16,080. Divide by the price: a 6.43% cap rate.
What is a good cap rate?
It depends on the market and the risk. Newer properties in high-demand metros often trade at 4–6%. Older properties or smaller markets usually need 7–10% to compensate for higher maintenance and vacancy risk. Compare a property against recent sales of similar buildings in the same area, not against a national number.
Common questions
Does cap rate include the mortgage?
No. Cap rate measures the property's return as if bought in cash. Use cash-on-cash return to include financing.
Should I use asking price or my offer?
Run both. The cap rate at asking shows how the seller values it; the cap rate at your offer shows the return you'd actually get.