How to Evaluate Cap Rate on a Rental Property
By TurnKey Rental Editorial · Updated 2026-07-28
Capitalization rate (cap rate) is a property's annual net operating income divided by its price. If a $150,000 rental produces $12,000 of net operating income a year, its cap rate is 8%. It's the fastest way to compare income properties across markets because it ignores financing — it measures what the asset itself earns.
The formula, done honestly
Cap rate = Net Operating Income (NOI) ÷ Purchase Price, where NOI is annual rent minus all operating expenses:
- Property taxes and insurance
- Property management (typically 8–10% of rent, plus leasing fees)
- Maintenance and repairs (commonly budgeted at 5–10% of rent)
- Capital-expenditure reserves (roof, HVAC, water heater)
- Vacancy allowance (commonly 5–8%)
- Any utilities, HOA dues, or lawn/snow service the owner pays
NOI excludes mortgage payments and depreciation. The most common trick in seller pro-formas is omitting expense lines — a "10% cap rate" that skips maintenance, capex, and vacancy is often a 6–7% cap rate in practice. Recalculate NOI yourself with every line item before trusting any advertised number.
What's a good cap rate for a turnkey rental?
Cap rate prices risk: higher cap rates come with older housing stock, rougher neighborhoods, or less reliable rent collection; lower cap rates buy newer homes in stronger areas. As a rough map of today's turnkey market: appreciation-oriented newer homes often trade at 4–5.5%, balanced markets at 6–7%, and affordable Midwest cash-flow markets at 8%+. Compare live examples on our 6%+ cap rate and 8%+ cap rate pages.
Cap rate vs. gross yield vs. cash-on-cash
Some listings advertise gross yield (annual rent ÷ price, no expenses) — a bigger, prettier number than cap rate; a 9% gross yield may be a 5–6% cap rate. Cash-on-cash return measures your levered return (cash flow after mortgage ÷ cash invested) and depends on your loan terms. Use cap rate to compare properties, cash-on-cash to evaluate your specific deal, and never compare one listing's gross yield against another's cap rate.
Checklist before you trust a cap rate
- Is the rent figure the actual lease rent or a projected market rent?
- Are taxes based on the post-sale reassessed value, not the seller's current bill?
- Are management, maintenance, capex, and vacancy all in the expense line?
- Is insurance quoted for a landlord policy in that specific ZIP code?
Once you can re-derive a listing's cap rate from its own numbers, you can shop with confidence. Start with our turnkey listings by market — every property links to its original source so you can check the underlying figures yourself.