What Is a Good Cap Rate for Rental Property? (2026 Guide)

If you're evaluating a rental property, cap rate is usually the first number anyone mentions — and also one of the most misunderstood. Here's what it actually means, how to calculate it, and what counts as "good."

What Cap Rate Actually Measures

Cap rate (short for capitalization rate) tells you the return a property generates from its income alone, before financing enters the picture. It answers a simple question: if you bought this property in cash, with no loan at all, what percentage return would the income give you each year?

The formula:
Cap Rate = Net Operating Income (NOI) ÷ Purchase Price

Net Operating Income is your rental income minus operating expenses (property tax, insurance, maintenance, management) — but beforesubtracting your mortgage payment. That last part matters: cap rate deliberately ignores financing, so you can compare two properties fairly even if one has a mortgage and one doesn't.

A Real Example

Say a property costs $300,000 and generates $24,000 a year in NOI after expenses.

Cap Rate = $24,000 ÷ $300,000 = 8%

So What's "Good"?

There's no single universal number — it depends heavily on market and property type:

• 4-6%: Common in expensive, high-demand metro markets (think major coastal cities), where investors accept lower yield for stability and appreciation potential
• 7-10%: A more typical range for many secondary markets and standard rental properties
• 10%+: Often signals either a genuinely great deal, or a property with more risk (older building, less stable area, deferred maintenance) that requires closer scrutiny

The honest answer: cap rate alone doesn't tell you if a deal is good — it tells you one piece of the picture. A property with an 8% cap rate but heavy deferred maintenance might be a worse deal than one at 6% in better condition.

What Cap Rate Doesn't Tell You

Cap rate ignores your financing entirely, which means it won't tell you what your actual cash flow will look like if you take out a loan. For that, you need cash-on-cash return — a different, complementary metric (we cover that here: cap rate vs. cash-on-cash return).

Calculate It Instantly, With the Math Shown

Manually calculating cap rate for one property is simple enough. Comparing several deals side by side, factoring in different expense structures, gets tedious fast. Aurum Reserve calculates cap rate (and every other underwriting metric) automatically — and shows you the exact formula and numbers behind every result, so you're never just trusting a black-box output.