Cap rate is the quickest way to compare two rental properties on income alone, before financing enters the picture. Here is how to calculate it, what counts as a good number in 2026, and why the same cap rate can mean a great deal in one market and a weak one in another.
In 2026, many buy-and-hold investors treat roughly 6% or higher as a healthy cap rate for a cash-flow rental, while 4% to 5% is common in pricier appreciation markets. That 6% is a broker-basis figure, the way listings quote it. DealGauge sets aside a capital expenditure reserve before dividing, so the same property reads about 5% in the tool, and that is where the grade awards full cap rate marks. There is no universal "good" number. A cap rate is only meaningful against the market, the property class, and the risk. Always compare it to other deals and to safer alternatives.
The formula is simple:
Cap rate = annual net operating income ÷ purchase price
Net operating income (NOI) is the rent left after every operating expense, but before the mortgage. That means you subtract vacancy, repairs and maintenance, property management, insurance, and property taxes, then divide by the price. A property that produces $18,000 of NOI on a $300,000 price has a 6% cap rate.
Because cap rate ignores the loan, it lets you compare two buildings on their own merits, regardless of how each is financed.
| Cap rate | Rough read |
|---|---|
| Under 5% | Common in expensive, appreciation-focused markets. Thin income, you are betting on price growth. |
| 5% to 6% | Middle ground. Workable in stable markets, but check that cash flow survives after the loan. |
| 6% to 8% | The range many cash-flow investors target in 2026. |
| Over 8% | Strong on paper. Double-check the expenses are fully loaded and the neighborhood risk is real, not hidden. |
These are rules of thumb, not promises. A high cap rate often carries higher risk, and a low one can still work if appreciation and stability are on your side.
Every band in the table above is on the broker basis, with no capital expenditure reserve taken out. To read them against a DealGauge cap rate, subtract about a point: the 6% to 8% row is roughly 5% to 7% in the tool, and the grade gives full cap rate marks from 5% up. The methodology page sets out the conversion in full.
A 6% cap rate on a well-kept property in a growing metro is very different from a 6% cap on an aging building in a shrinking town. Cap rate says nothing about future rent growth, vacancy risk, or big repairs on the horizon. Use it to shortlist, then dig into the specifics before you offer.
DealGauge sets aside a capital-expenditure reserve inside operating costs before it calculates cap rate, so its number reads more conservatively than a broker's, which usually leaves CapEx out. It is the same property, measured more cautiously.
No. A higher cap rate usually signals higher risk, whether from the neighborhood, the building's age, or unstable rents. Balance the yield against the risk and your goals.
Cap rate ignores financing and divides NOI by price. Cash-on-cash uses your actual cash invested and cash flow after the loan, so it reflects your real return. See our guide on cash-on-cash return.
Use it to compare and shortlist, not as a single pass-fail test. Run the full numbers, including financing and reserves, before deciding.
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General information and educational content only, not investment, tax, or legal advice. Benchmarks are common rules of thumb, not guarantees or projected results. Verify every figure and consult a qualified professional before purchasing any property.