Ask what a good cap rate is and you get a range: 5 to 10%, or 4% in a city and 8% in a small town. None of those answers tell you what to offer on the house in front of you.
The cap rate is more useful read the other way. Pick the return you want, and it gives you a price.
What is a cap rate?
A cap rate is a property’s yearly income after running costs, divided by its price. The mortgage stays out of it, so the same house has the same cap rate whether you pay cash or borrow 80%.
The income half has a name: net operating income, or NOI. It is a year of rent, less an allowance for empty months, less taxes, insurance, repairs, money set aside for big repairs and management. How to calculate NOI walks through which costs belong in it and which do not.
Here is one house. It is on the market at $320,000 and rents for $2,950 a month. Property taxes run $3,840 a year and insurance $1,800. Five percent of the rent is set aside for empty months, 5% for repairs, 5% for the roof and the furnace, and management takes 8%.
| Amount | |
|---|---|
| Rent for the year | $35,400 |
| Empty months (5%) | −$1,770 |
| Repairs (5%) | −$1,770 |
| Set aside for big repairs (5%) | −$1,770 |
| Management (8%) | −$2,832 |
| Property taxes | −$3,840 |
| Insurance | −$1,800 |
| Net operating income | $21,618 |
These are example figures, not a forecast for any market.
That $21,618 divided by the $320,000 price is a 6.8% cap rate. The calculator shows it on the row labeled Cap rate.
What is a good cap rate for a rental property?
There is no published benchmark for a single house. Cap rate surveys cover large apartment buildings bought by institutions, and a three-bedroom on a residential street is not in that data at all.
So the number that matters is your own. A cap rate is a price you are willing to pay for a stream of income, and the return you need depends on what else that money could do and how much work the house will be.
Two things push the figure up. The first is risk: an older house, a soft rental market or a single tenant in a single unit all argue for a higher number, because the income is less certain. The second is what you could earn doing nothing. As of September 28, 2026 the 10-year Treasury note yielded 5.24% (Federal Reserve H.15, released September 29, 2026). That is a government bond with no tenants, no roof and no vacancy.
A 6.8% cap rate is 1.6 points above that. Whether 1.6 points is enough pay for collecting rent, fixing furnaces and carrying the risk of an empty month is the actual question, and it is yours to answer rather than a number to look up.
What should you pay, then?
Turn the division around. Divide the NOI by the return you want and you get the price that delivers it.
At a 7% target, $21,618 buys a price of $308,828. The rental calculator has a field called Return you want, and the row below the cap rate reads Worth at your 7% target.
| Return you want | Price that delivers it | Against the $320,000 asking price | |
|---|---|---|---|
| 6% | $360,300 | $40,300 above | |
| 7% | $308,828 | $11,172 under | |
| 8% | $270,225 | $49,775 under | |
| 9% | $240,200 | $79,800 under |
Read the second row as an offer. A buyer who needs 7% can pay $308,828 for this house, which is $11,172 below what the seller is asking. That is a number you can put in an email.
Read the bottom row as a warning. If you need 9% on a single-family rental, this house is $79,800 away from working, and no amount of negotiating gets you there.
What moves a cap rate without changing the house?
Most of it. The price moves with the market. The tax bill often resets when a house sells, so the figure on the seller’s pro forma can be wrong the day you close. Insurance depends on the roof and the claims history. Vacancy is a number you pick, and picking 5% instead of 8% adds about a fifth of a point to the cap rate on this house.
That is why two people run the same listing and disagree. They are not arguing about cap rates. They are arguing about the running costs underneath. The mistakes that break a rental analysis lists the ones that move the answer most.
Where the cap rate stops helping
Cap rate says nothing about your loan, and the loan is what decides whether money lands in your account each month. This house at 6.8% clears $98 a month after a 30-year mortgage at 7% with 20% down, which is thin enough that one bad month erases it. Cap rate vs. cash-on-cash return shows the same house bought four ways, with the cap rate holding steady while the return on your cash swings.
It also says nothing about how much cushion you have. How much a rental should cash flow covers that side.
Use the cap rate for what it is good at: comparing houses at different prices, and converting the return you need into the price you can pay. Put your own target in the Return you want field, then look at the gap between that price and the asking price. If the gap is small, you have a negotiation. If it is large, you have your answer.