Cap Rate Calculator: Formula, Benchmarks, and How to Use It (2026)

Cap rate is the most widely used metric in real estate investment — and one of the most frequently misapplied. The formula is simple: Net Operating Income divided by property value. But landlords routinely include mortgage payments in their expense calculations (which breaks the metric entirely), benchmark their results against national averages that bear no relation to their specific market, or confuse cap rate with gross yield and draw the wrong conclusions.

This guide covers the cap rate formula correctly, walks through a full worked example, explains what distinguishes a good cap rate from a bad one by market and property type, and clarifies when cap rate is the right metric versus when you should be using gross yield or cash-on-cash return instead. To calculate cap rate for a specific property, use the free cap rate calculator — it calculates NOI, cap rate, and gross rent multiplier without a spreadsheet.

Key Takeaways

• Cap Rate = Net Operating Income (NOI) ÷ Current Market Value × 100. Mortgage is never included in NOI.
• A cap rate of 5–7% is a common benchmark for residential rental properties in US secondary markets; primary markets (NYC, LA, SF) typically run 3–5%
• Cap rate compares properties on equal footing regardless of financing — that’s its strength and its limitation
• Gross yield overstates returns by ignoring operating costs; cap rate corrects for this without factoring in leverage
• Cash-on-cash return accounts for your specific financing and is what actually determines monthly cash flow

What Is Cap Rate?

Capitalization rate (cap rate) measures the annual return a property produces relative to its current market value, assuming it was purchased with cash. It’s a property-level metric — it tells you how the asset performs, independent of how you finance it.

The formula exists specifically to strip out financing decisions so two properties can be compared fairly. A property purchased for cash and the same property with a 20% down loan look identical from a cap rate perspective. That makes cap rate useful for screening deals and comparing markets. It makes cap rate useless for calculating your actual cash return as a leveraged buyer — that’s what cash-on-cash is for.

The Cap Rate Formula

Cap Rate = (Net Operating Income ÷ Current Market Value) × 100

Net Operating Income (NOI) = Gross Rental Income − Operating Expenses

Operating expenses include:

• Property taxes
• Insurance
• Maintenance and repairs
• Property management fees
• Vacancy allowance (typically 5–8% of gross rent)
• HOA fees (if applicable)

Operating expenses do not include mortgage principal or interest, depreciation, or income taxes. These are investor-level items that vary based on individual financing — including them in NOI makes cap rate meaningless as a comparison tool.

Worked Example

Property: Single-family rental in a Midwest secondary market Purchase price (= current market value): $150,000 Monthly rent: $1,300 → Annual gross rent: $15,600

Annual operating expenses:

NOI: $15,600 − $6,228 = $9,372

Cap Rate: $9,372 ÷ $150,000 × 100 = 6.2%

Note: if you financed this property with 20% down ($30,000) and a 6.5% 30-year mortgage ($120,000), your annual debt service would be approximately $9,100. Your cash-on-cash return would be ($9,372 − $9,100) ÷ $30,000 = 0.9% — a far lower figure than cap rate suggests, and the metric that actually matters for your out-of-pocket return.

To run these numbers for any property without building a spreadsheet, use the free cap rate calculator.

Our finding: The gap between cap rate and cash-on-cash return has widened significantly since 2022 as mortgage rates rose from 3% to 6.5–7%. At 3% rates, a 6% cap rate property could cash-flow positively with 20% down. At 7% rates, the same property often produces near-zero or negative cash-on-cash. Cap rate hasn’t changed — the financing environment did. This is why investors relying solely on cap rate for deal screening are making riskier decisions in 2026 than the same analysis would have produced in 2021.

What Is a Good Cap Rate?

A “good” cap rate depends entirely on the market and property type. There is no universal good cap rate — a 5% cap rate in Manhattan is exceptional; a 5% cap rate in rural Ohio means you can probably find something better nearby.

The general principle: higher cap rate = higher risk or lower property quality (or both). Markets with strong demand, population growth, and employment stability compress cap rates because buyers pay up for predictable income. Markets with higher vacancy risk, slower growth, or more maintenance-intensive housing stock expand cap rates to compensate investors for the additional risk.

Our finding: Investors new to a market often anchor on national cap rate averages (which run 5–6% for residential) and apply them to properties in specific submarkets where the range might be 3.5–5% or 7–9%. The national average is meaningless for individual deal analysis. The right benchmark is the prevailing cap rate for comparable properties that have recently sold in the same submarket — not an industry aggregate.

Compare cap rate with gross and net rental yield

Cap Rate vs. Gross Yield vs. Cash-on-Cash Return

These three metrics answer three different questions. Using the wrong metric for the wrong decision is the most common analytical error in residential real estate.

When to use cap rate: Screening deals, comparing markets, estimating what a property would sell for if you know the NOI and the market’s prevailing cap rate.

When cap rate is the wrong tool: Evaluating whether a specific deal makes sense for you personally — because your financing structure, down payment, and rate all change the actual return. Use cash-on-cash for that.

Gross yield as a first pass: Gross yield (annual rent ÷ purchase price) is faster to calculate and useful for eliminating obvious misses — if gross yield is under 6% in a market where all expenses run 45%, the property will never generate meaningful cap rate. But gross yield cannot stand alone for any serious analysis because it ignores the expenses that determine actual performance.

Calculate rental yield step by step

The Four Cap Rate Calculation Mistakes

1. Including mortgage payments in operating expenses

This is the most common and most consequential error. When mortgage principal and interest are included in “expenses” before calculating NOI, the resulting figure is not a cap rate — it’s a financing-specific return metric that can’t be compared to any other property with different financing. Two investors buying the same property with different loans would get different “cap rates,” which defeats the purpose entirely.

2. Using list price instead of current market value

Cap rate uses current market value in the denominator — not the price you paid ten years ago, not the listing price, not the assessed value. For properties you already own, use a realistic current market value estimate (a recent comparable sale analysis, not your purchase price). The cap rate on a property you bought for $80,000 that’s now worth $200,000 is based on $200,000 — not $80,000.

3. Omitting vacancy from operating expenses

A property with 100% occupancy all year is an assumption, not a business plan. Vacancy should be modeled at 5–8% of annual gross rent for standard residential properties. Omitting it overstates NOI by a full month of rent or more — and overstates cap rate accordingly.

4. Treating cap rate as a return on your investment

Cap rate tells you about the property, not about your returns as a leveraged buyer. If you put 20% down, you’re not earning the cap rate on your money — you’re earning a cash-on-cash return that reflects your specific financing cost. In high-rate environments, these two numbers diverge dramatically. A 6.5% cap rate property with a 7% mortgage rate can produce negative cash-on-cash, meaning the property is technically “performing well” on a cap rate basis while your personal cash returns are negative.

Cap Rates in Vietnam

Vietnam’s rental market doesn’t use cap rate as a standard term — landlords more commonly discuss gross rental yield — but the underlying calculation is the same. HCMC gross yields average 4.6% for Grade A apartments in 2026, with lower-grade residential running 6–9% (Bamboo Routes, 2026).

Applying cap rate methodology to Vietnam requires specific adjustments:

Tax on gross revenue, not net income. Vietnam’s Personal Income Tax on rental income (5% on revenue above VND 100 million annually) applies to gross rent, not NOI. This means it functions as an operating cost reduction to NOI, unlike US property taxes which are simply an operating expense.

No mortgage interest deduction. Vietnamese tax law doesn’t offer the deductibility that makes US leveraged rental investing tax-efficient. The cap rate vs. cash-on-cash gap for Vietnam investors is therefore different from the US calculation.

Utility billing complexity. Vietnam landlords managing their own utility pass-throughs need to account for EVN’s six-tier progressive electricity rate when estimating operating expenses — a cost structure with no equivalent in most Western markets.

Net cap rates (after Vietnam-specific operating costs) in HCMC typically run 3–4.5% for well-located Grade A properties — comparable to or slightly below US primary market cap rates for similar asset quality.

See how rental yield benchmarks compare

Frequently Asked Questions

How do I calculate cap rate?

Cap rate is calculated by dividing Net Operating Income (NOI) by the property’s current market value, then multiplying by 100 to express as a percentage. NOI equals gross rental income minus all operating expenses (taxes, insurance, maintenance, management fees, and vacancy allowance). Mortgage payments are never included in NOI. Example: a property worth $300,000 generating $18,000 in annual rent with $7,200 in operating expenses has an NOI of $10,800 and a cap rate of 3.6%. Use the free cap rate calculator to run this calculation for any property.

What is a good cap rate for a rental property?

A good cap rate depends on the market and property type. In primary US markets (New York, Los Angeles, San Francisco), 3.5–5% is typical for residential properties. In secondary markets (Denver, Atlanta, Nashville), 4.5–6.5% is common. In smaller or tertiary markets, 6–9% cap rates are achievable. Higher cap rates compensate for higher risk, weaker demand, or lower property quality — they aren’t inherently better. A 9% cap rate in a market with 15% vacancy rates may be worse than a 4.5% cap rate in a stable market.

What is the difference between cap rate and gross yield?

Gross yield = Annual Rent ÷ Purchase Price. Cap rate = NOI ÷ Market Value. The key differences are: cap rate deducts operating expenses (taxes, insurance, maintenance, vacancy, management) before dividing, while gross yield uses raw rental income. Cap rate uses current market value, not necessarily purchase price. For the same property, cap rate is always lower than gross yield — often by 30–50% — because operating costs consume a significant portion of gross rent. Gross yield is a useful quick filter; cap rate is the more meaningful investment metric.

Does cap rate include mortgage payments?

No — and including mortgage payments is the most common cap rate calculation error. Cap rate is deliberately financing-independent. Including debt service in the expense calculation produces a number that reflects your specific loan terms, not the property’s performance. Two buyers with different down payments or rates would get different “cap rates” for the same property. If you want to factor in your financing, calculate cash-on-cash return instead: (Annual Gross Rent − Operating Expenses − Debt Service) ÷ Cash Invested × 100.

How is cap rate used to value a property?

Cap rate can be used to estimate what a property should sell for given its income. The formula inverts: Value = NOI ÷ Cap Rate. If a market’s prevailing cap rate for similar properties is 6%, and your property generates $12,000 in NOI annually, the implied value is $12,000 ÷ 0.06 = $200,000. This is the income approach to valuation — commonly used for commercial and multifamily properties where income is the primary driver of value.

When should I use cash-on-cash return instead of cap rate?

Use cash-on-cash return whenever you’re evaluating a deal you’ll actually finance. Cap rate tells you how the property performs in the abstract. Cash-on-cash tells you what you’ll actually earn on the money you put in, after accounting for your mortgage payment. In a 7% rate environment, many properties with cap rates of 5–6% produce near-zero or negative cash-on-cash returns with typical leverage — something cap rate alone won’t reveal. For any purchase decision involving a mortgage, run both metrics.

The Bottom Line

Cap rate is a property comparison tool, not a personal return calculator. It answers the question: “How does this asset perform, independent of how it’s financed?” That makes it genuinely useful for screening deals and comparing markets — and useless for determining whether a specific leveraged deal makes financial sense for you.

The calculation is straightforward when done correctly: NOI (operating income minus operating expenses, never including mortgage) divided by current market value. The error is usually in the inputs — mortgage included, vacancy omitted, list price used instead of market value.

For landlords managing a Vietnam portfolio, Hausive tracks rental income, operating expenses, and utility costs automatically — giving you the clean NOI data needed to calculate cap rates without manually reconciling spreadsheets.

See how rental yield benchmarks compare Track income and expenses automatically

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Free Tools:

• Cap Rate Calculator — Calculate NOI, cap rate, and gross rent multiplier for any property instantly

Finance:

• Vietnam Rental Yield Calculator: Gross and Net Yield
• Passive Income from Rental Property: What Landlords Actually Earn
• Vietnam Rental Income Tax Guide for Landlords

Operations:

• Landlord Responsibilities: The Complete Legal and Operational Checklist
• Best Landlord Accounting Software in 2026

Software:

• Best Property Management Software for Vietnam Landlords in 2026