Cap Rate in Real Estate: How Landlords Price Your Deal

The cap rate in real estate is a property’s annual net operating income divided by its price or value, so a rental that nets $9,000 a year after operating expenses and sells for $130,000 has a cap rate of about 6.9 percent. It measures what a property earns on its own, before any mortgage, which makes it the fastest way to compare one rental with another and to work out what a landlord should pay.

Wholesalers who sell to landlords run into cap rate constantly. Flippers price your deal off after-repair value; buy-and-hold investors price it off income. If you can build a believable net operating income and convert it to a price at your buyer’s target cap rate, you can tell within minutes whether a contract has room for your fee.

The cap rate formula, in plain terms

Wall Street Prep’s cap rate guide states the formula as “Cap Rate (%) = Net Operating Income (NOI) ÷ Property Value,” and the Corporate Finance Institute’s explainer describes it the same way. The formula rearranges two ways, and both are useful:

You know	You want	Formula
NOI and price	Cap rate	NOI ÷ price
NOI and target cap rate	Value or maximum price	NOI ÷ cap rate
Price and target cap rate	NOI needed	Price × cap rate

The middle row is the one wholesalers use most. A buyer who says “I need an 8 cap” is telling you the most they will pay for any given income stream.

Building NOI line by line

Cap rate is only as honest as the net operating income behind it, and NOI is where sellers, agents and beginners all tend to be generous. NOI is rental income minus the costs of operating the property. It does not subtract mortgage payments or interest; Wall Street Prep notes that the cap rate “does not include mortgage payments or interest,” and depreciation is a tax concept that stays out as well.

1. Gross scheduled rent. Twelve months of market rent for the property in rent-ready condition, supported by recent leased comparables.
2. Vacancy and credit loss. A percentage of gross rent for empty months, turnover and unpaid rent. Use local experience, not zero.
3. Property taxes. The actual current bill, and a note if a sale will trigger reassessment in that county.
4. Insurance. A real landlord policy quote, which in coastal and storm-exposed areas can be much higher than a homeowner policy.
5. Repairs and maintenance. Routine work: leaks, appliance repairs, turnover paint.
6. Capital reserves. Money set aside for roofs, furnaces, water heaters and flooring.
7. Management. A property manager’s fee, even if the buyer self-manages, because their time has a cost and the next buyer will price it in.
8. Owner-paid utilities and HOA dues. Common on small multifamily and condos.

The capital reserves argument

Investors disagree on whether capital reserves belong in NOI. Commercial brokers often leave them out, which makes cap rates look higher. Many single-family landlords put them in, because a $12,000 roof on a $130,000 house is not a rare event. Neither approach is wrong, but mixing them is. When you compare your deal with a buyer’s target, ask how they treat reserves, and state on your deal sheet whether your NOI includes them.

Worked example: a single-family rental

Every figure here is hypothetical. A three-bedroom house will rent for $1,600 a month once a buyer finishes $18,000 of repairs. Taxes are $2,400 a year and a landlord policy is quoted at $1,500.

Line item	Annual
Gross scheduled rent ($1,600 × 12)	$19,200
Vacancy and credit loss (8%)	-$1,536
Effective gross income	$17,664
Property taxes	-$2,400
Insurance	-$1,500
Repairs (8% of gross rent)	-$1,536
Capital reserves (7% of gross rent)	-$1,344
Management (10% of collected rent)	-$1,766
Net operating income	$9,118

Operating expenses plus vacancy come to about 53 percent of gross rent, close to the rough “50 percent rule” landlords use as a sanity check. Now apply different prices to the same income:

All-in price	Cap rate on $9,118 NOI
$160,000	5.7%
$151,960	6.0%
$130,251	7.0%
$113,970	8.0%
$101,307	9.0%

A one-point change in cap rate moves the value of this house by $12,000 to $22,000. That sensitivity is why buyers argue about half a point, and why a sloppy expense estimate can wipe out a wholesale fee.

Pricing a wholesale deal backward from a cap rate

Continue with the same hypothetical house. You have two landlord buyers in the area. Buyer A wants a 7.5 percent cap rate on their all-in cost. Buyer B, who is happy with a newer tenant base and lower turnover, accepts 6.5 percent. Both expect to spend $18,000 on repairs and about $3,000 on closing costs.

Step	Buyer A (7.5%)	Buyer B (6.5%)
Maximum all-in cost (NOI ÷ cap rate)	$121,568	$140,271
Less repairs	-$18,000	-$18,000
Less closing costs	-$3,000	-$3,000
Most the buyer pays for the contract	$100,568	$119,271

If you have the house under contract at $98,000, Buyer A leaves you about $2,500 and Buyer B leaves about $21,000. One point of cap rate is worth nearly $19,000 on this deal. That is why collecting each buyer’s target cap rate, along with their areas and property types, is part of building a buy box rather than an afterthought. It also explains why the same house can be a pass for one landlord and a strong deal for another.

Run a flipper’s number too. If after-repair value comparables support a retail resale, your offer should be the lower of the rental price and the flip price from the MAO calculator, unless you know which buyer type will take it.

Cap rates, interest rates and negative leverage

Cap rate ignores financing, but buyers do not. The key comparison is the cap rate against the loan constant, which is the annual mortgage payment as a percentage of the loan. On a 30-year amortizing loan, the constant is about 8.3 percent at a 7.4 percent rate and about 8.8 percent at 8.0 percent (our calculations). If the property’s cap rate is below the loan constant, every borrowed dollar costs more than it earns, which investors call negative leverage.

Those figures come from Freddie Mac’s Primary Mortgage Market Survey, which reported a 7.40 percent average 30-year rate as of October 15, 2026; the St. Louis Fed’s 10-year Treasury series, which showed 5.10 percent the same day; and CRE Daily’s summary of CBRE’s H1 2026 survey, which put all-property cap rates near 6.6 percent. CBRE’s own H1 2026 cap rate survey described the all-property average as “essentially flat.” Note that the Freddie Mac rate is for owner-occupied conventional loans, and investor loans usually cost more.

Back to the hypothetical house, bought at $130,000 for a 7.0 percent cap rate. With a 75 percent loan at 8.0 percent, annual debt service is about $8,585, leaving roughly $533 of cash flow on about $36,500 invested (down payment plus closing costs): a 1.5 percent cash-on-cash return. At a 6.0 percent loan rate, the same house would produce about $2,103 a year, or 5.8 percent. Same property, same cap rate, very different investment. Check the scenarios yourself in the cash-on-cash return calculator.

This is why many financed landlords in 2026 want higher cap rates than they accepted a few years ago, or put more cash down, or buy only when they can add value. Our guide to DSCR loans shows how rental lenders turn the same income into a loan limit.

Second example: a duplex with a seller’s pro forma

Small multifamily is where cap rate claims get stretched the most. All figures here are hypothetical. An owner of a side-by-side duplex asks $185,000 and tells you it is “a 9 cap.” The units rent for $1,150 and $1,050, or $26,400 a year, and the owner pays water and sewer.

Line item	Seller’s version	Rebuilt version
Gross scheduled rent	$26,400	$26,400
Vacancy and credit loss (7%)	Not included	-$1,848
Property taxes	-$3,600	-$3,600
Insurance	-$2,200	-$2,200
Water and sewer	-$1,200	-$1,200
Repairs (8% of gross)	-$2,112	-$2,112
Capital reserves (8% of gross)	Not included	-$2,112
Management (9% of collected)	Not included	-$2,210
NOI	$17,288	$11,118
Cap rate at $185,000	9.3%	6.0%

The seller is not lying about any single number. They simply manage it themselves, have had the same tenants for years and have not replaced a roof recently. A buyer will not price it that way. At a 7.5 percent target on the rebuilt NOI, the duplex is worth about $148,200 to a landlord before repairs, roughly $37,000 below the asking price. If you contract it at the seller’s number because you believed their cap rate, you own a deal no buyer will take. Rebuild every NOI you are given, and show the seller the rebuilt version when you explain your offer; it is a much easier conversation than a flat lowball. On larger income properties, those rebuilt numbers usually go into a letter of intent before anyone drafts a full purchase contract.

What is a good cap rate in real estate?

There is no single answer, because cap rate reflects risk as much as return. Lower cap rates usually mean newer buildings, stronger locations, lower expected turnover and buyers who expect appreciation. Higher cap rates usually mean older housing stock, weaker rent growth, more management work or more uncertainty about the income. Large apartment investors track market surveys by city and class; for example, Multi-Housing News reported CBRE’s H2 2025 ranges for Class A stabilized multifamily at 4.5 to 5 percent in Atlanta and New York City and 5.25 to 5.5 percent for infill Chicago.

Those institutional figures describe large, professionally managed apartment properties. Single-family rentals and small multifamily bought off-market from motivated sellers trade on different terms, and cap rates on the deals wholesalers sell are often higher than those surveys show, because the properties are older, need work and come with more risk. The right “good” cap rate for your deal is whatever your active buyers in that neighborhood will accept, which is why you ask them.

How cap rates vary by state and market

Property taxes and insurance are two expenses that change sharply across state lines, and both flow straight into NOI. Two houses with identical rent and price can carry very different cap rates because one sits in a high-tax county or a storm-exposed insurance market. Rent control and tenant protection rules, which differ by state and city, also affect how buyers value future income. When you work a market from a distance, check local tax rates and insurance quotes before you trust a cap rate, and use our state-by-state wholesaling guides for local rules.

Cap rate compared with other rental metrics

Metric	Formula	Includes financing?	Best use
Cap rate	NOI ÷ price	No	Comparing properties and setting price
Cash-on-cash return	Annual cash flow ÷ cash invested	Yes	What the buyer earns on their dollars
1 percent rule	Monthly rent ÷ price	No	A quick first screen
Gross rent multiplier	Price ÷ annual gross rent	No	Rough comparison when expense data is thin
DSCR	Rent or NOI ÷ debt payments	Yes	Whether a lender will make the loan

Most buyers use them as a funnel: a quick screen like the 1 percent rule or a gross rent multiplier check against local rented comps, then cap rate to set price, then cash-on-cash and DSCR to test financing. Buyers using a refinance strategy add one more check, described in the BRRRR method. Our cash-on-cash return guide walks through that financing test with a worked duplex example.

How to present cap rate on a deal sheet

• Show the NOI build. Every line item, the percentages you used and whether reserves are included.
• Attach rent evidence. Two or three leased comparables with addresses, or a property manager’s written opinion.
• Use the real tax bill. Note reassessment risk where the county revalues on sale.
• State the cap rate on all-in cost. Price plus repairs plus closing costs, not price alone.
• Disclose existing leases. If a tenant is in place, include the lease terms; see tenant-occupied property.

Landlords who can verify your math in two minutes trust your next deal faster. Our guide to real estate dispositions covers packaging and marketing the contract.

Where cap rate misleads beginners

• Pro forma NOI. A seller’s “cap rate” often uses projected rent and leaves out vacancy, management or reserves. Rebuild it yourself.
• High cap, high risk. A 12 percent cap rate on a cheap house can come with heavy turnover, collections problems and deferred maintenance that never shows up in a one-year NOI.
• Ignoring financing. A solid cap rate can still produce negative cash flow when the loan constant is higher.
• Using cap rate on a flip. If the exit is a retail sale, rent is irrelevant; price it from after-repair value instead, as in how to calculate ARV.
• Comparing apples to oranges. A cap rate with reserves and one without can differ by a full point on the same property.

The money a wholesaler loses on cap rate is usually lost before the contract is signed: an optimistic rent, a missing insurance line or a buyer’s target that was never asked for. Ask first, build the NOI conservatively, and let the cap rate tell you the price.

Cap rate questions

Is a higher cap rate better?

For a buyer, a higher cap rate means more income per dollar of price, but it usually comes with more risk. For a seller, a lower cap rate means a higher price. “Better” depends on which side you are on and how much risk the buyer accepts. Cap rate also ignores financing, timing and the eventual sale; the internal rate of return is the measure that captures all three over a full hold.

Does cap rate include the mortgage?

No. Cap rate is calculated before debt service. Use cash-on-cash return or DSCR to see the effect of a loan.

Should I use purchase price or all-in cost?

For a property that needs work, use all-in cost: price, repairs and closing costs. Using purchase price alone makes every fixer-upper look more profitable than it is.

How do rising interest rates affect cap rates?

Higher borrowing costs tend to push the cap rates buyers demand upward, which lowers prices for the same income, though markets adjust unevenly and with a lag. CBRE’s midyear 2026 outlook expected cap rates to hold relatively steady for the rest of the year.

What is the difference between cap rate and ROI?

Cap rate is a property-level measure of income relative to price. ROI is a broader term for the buyer’s total return, which can include cash flow, loan paydown, appreciation and tax effects, all measured against the cash they invested. Two buyers can earn very different returns on the same cap rate.

Tools for income-based pricing