Is a higher cap rate always better?

Not necessarily. Higher cap rates often signal higher risk—lower-quality tenants, deferred maintenance, or weaker markets. A 4% cap in a growing market may outperform an 8% cap in a declining one when total return is considered.

What is a good cap rate in 2026?

Market-dependent. Primary markets often see 4–6%, secondary 6–8%, and tertiary or value-add deals 8–12%. Compare within sub-markets, not across the entire country.

Does cap rate include debt service?

No. Cap rate is an unlevered metric—it ignores financing. For leveraged returns, calculate cash-on-cash return instead.

Can I use cap rate for flip deals?

Not meaningfully. Cap rate applies to income-producing properties with stabilized rents. For flips, focus on gross spread, 70% rule, and estimated net profit.

Cap Rate in Real Estate: Formula, Good Rates, and When to Use It

Cap rate in real estate

OffMarket Deck · Updated 2026-05-07

Cap rate (capitalization rate) is the ratio of a property's net operating income (NOI) to its purchase price or current market value. It expresses the annual return an investor would earn if they bought the property entirely in cash, with no financing. Cap rate is an unlevered, property-level metric—not a personal return measure.

Cap rate in real estate is the quickest way investors compare income-producing properties across markets and asset classes. It strips away financing differences so you can evaluate the property itself, not your bank's terms.

Key takeaway

Cap rate measures the property, not your deal. It tells you what the building earns relative to its price—before you introduce your down payment, interest rate, or tax situation.

The formula

Cap rate = Net Operating Income (NOI) ÷ Property Value

NOI is gross rental income minus operating expenses (property taxes, insurance, maintenance, management, utilities, vacancy reserve). It excludes debt service, depreciation, and capital expenditures.

Worked example

A duplex generates $2,000/month in rent ($24,000/year). Annual operating expenses are $9,600. NOI = $24,000 − $9,600 = $14,400. If the property is listed at $240,000, the cap rate = $14,400 ÷ $240,000 = 6.0%.

How investors use cap rate

Market comparison. Compare cap rates across similar properties in the same sub-market to identify relative value.
Valuation. If you know market cap rates and a property's NOI, you can estimate fair value: Value = NOI ÷ Cap Rate.
Exit planning. Rising cap rates compress values; falling cap rates expand them—track trends in your target market.

Cap rate limitations

Ignores financing. Two investors with different loan terms see identical cap rates but very different cash-on-cash returns.
Ignores capex. A property with a new roof and one needing $30,000 in repairs can have the same cap rate if NOI is identical.
Ignores growth. A 5% cap in a market with 5% annual rent growth may outperform a 7% cap in a stagnant market.

Using OffMarket Deck for cap-rate screening

On rental-focused deal rows, use the listed price and estimated rent to approximate NOI and cap rate. Open buy-and-hold deals in Florida or Texas, then refine with cash-on-cash once you know your financing terms.

Frequently asked questions

: Not necessarily. Higher cap rates often signal higher risk—lower-quality tenants, deferred maintenance, or weaker markets. A 4% cap in a growing market may outperform an 8% cap in a declining one when total return is considered.

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