What Is a Good Cap Rate for Rental Property?
Cap rate benchmarks by market and strategy, how Realy calculates NOI ÷ purchase price on Zillow listings, and when a high or low cap rate is actually a good deal.
Cap rate answers one question: If you bought the property all-cash, what annual return would the income produce? It strips out financing so you can compare deals on equal footing—whether you're in Dallas, Cleveland, or Phoenix.
Cap Rate Formula
In Realy, cap rate is calculated as:
NOI = Effective Gross Income − Total Operating Expenses
Cap Rate = NOI ÷ Purchase Price
Where effective gross income accounts for vacancy:
Effective Gross Income = (Monthly Rent × 12) − Vacancy Loss
Operating expenses include property taxes, insurance, maintenance, HOA, management fees, utilities, and other recurring costs—everything except mortgage payments.
Realy also shows a loaded cap rate (NOI ÷ Total Property Cost), which includes closing costs and renovation in the denominator. That number is often more conservative when you're putting real money into the deal beyond the list price.
What Counts as a "Good" Cap Rate?
There is no universal number. Context drives everything:
| Market type | Typical cap rate range | What it usually means |
|---|---|---|
| High-growth (Austin, Denver) | 3–5% | Lower yield, appreciation thesis |
| Balanced Midwest / Sun Belt | 5–7% | Mix of cash flow and equity |
| Cash-flow markets (parts of TX, OH, IN) | 7–10%+ | Income-first investing |
| Distressed / high-risk areas | 10%+ | Verify why the number is high |
Rule of thumb: Compare cap rate to your cost of capital and risk tolerance. A 4% cap in a market appreciating 8%/year may beat a 9% cap in a declining neighborhood with heavy vacancy.
Worked Example (Realy Defaults)
Assume a $200,000 purchase, $1,800/mo rent (Zillow Rent Zestimate), 2% property tax, and Realy's default loan assumptions elsewhere:
| Line item | Amount |
|---|---|
| Gross annual rent | $21,600 |
| Property taxes (2%) | $4,000 |
| Insurance + maintenance (modeled) | $2,400 |
| NOI | $15,200 |
| Cap rate | 7.6% |
Adjust rent or expenses in the Realy assumption panel and cap rate updates instantly on the Zillow listing.
When Cap Rate Misleads You
- Ignores leverage: A 5% cap property can still produce strong cash-on-cash with favorable financing.
- Uses optimistic rent: Zillow Rent Zestimate is a starting point—verify with comps.
- Skips capex: A high cap on a roof-ready-to-fail house is a trap, not a bargain.
- Condo/HOA blind spots: Missing HOA in the model inflates cap rate artificially.
See also: When a high cap rate is a trap.
How to Use Cap Rate on Zillow with Realy
- Install the Realy Chrome extension.
- Open any Zillow search or listing—cap rate appears on every analyzed property.
- Set your tax rate, vacancy, and expense assumptions once; compare the whole result set.
- Sort by cap rate in the extension table/map to shortlist income-focused deals.
Cap rate is your all-cash sanity check. Pair it with cash-on-cash return before you make an offer.