Cap Rate Calculator
Last updated July 2, 2026
The capitalization rate is the most widely used metric for comparing real estate investment opportunities because it removes financing from the equation entirely, allowing direct comparison of two properties regardless of how they'll be financed. The cap rate formula is simple: divide the property's net operating income by its purchase price or current market value. A property generating $18,000 in NOI on a $300,000 purchase price has a 6 percent cap rate. Another property generating $22,500 on a $375,000 purchase produces the same 6 percent cap rate — identical earning power relative to value, before financing decisions are made.
In 2026, residential rental cap rates in competitive markets range from approximately 4 to 7 percent for long-term rentals, with meaningful variation by market. Core urban markets with strong appreciation histories — San Francisco, New York, Boston — typically trade at cap rates below 5 percent, implying that buyers expect appreciation to compensate for lower current yield. Secondary and tertiary markets with strong rental demand but lower appreciation expectations often trade at 6 to 9 percent, reflecting higher current income relative to price. A property with a cap rate below 4 percent requires significant appreciation assumptions to justify the purchase price — essentially a speculative bet on the market rather than an income investment. The cap rate also fluctuates inversely with interest rates: as mortgage rates rise, cap rate thresholds rise with them because investors demand more income yield to compensate for higher financing costs.
Using cap rate to compare properties on equal terms — same market, similar property type — and to identify whether a deal is priced for income return or for appreciation speculation. A cap rate below your financing rate means the property is negatively leveraged before operating expenses, which requires clear appreciation thesis to justify. In 2026's rate environment, target cap rates of at least 5.5 to 6 percent for long-term rental properties to maintain positive leverage.