A cap rate (capitalization rate) is the annual net operating income (NOI) of a property divided by its price, expressed as a percentage. It is calculated by taking rent collected over a year, subtracting operating expenses such as taxes, insurance, maintenance and management (but not mortgage payments), and dividing the result by the purchase price or market value. Applied to the typical U.S. home as of June 30, 2026, DataPorium's housing data show a value of $368,142 and a rent index of $1,935 per month; if operating costs absorb 40% of rent, NOI is about $13,930 and the cap rate is 3.8% [1]. With the 10-year Treasury yielding 4.70% as of August 11, 2026, a good cap rate in 2026 for most residential property is one that sits above that risk-free rate, roughly 6% or more, and many large coastal cities do not get there [3].
What is a cap rate and how is it calculated?
The formula is NOI divided by property value. It measures the unlevered yield of a property, meaning the return before any borrowing. A higher cap rate means more income per dollar invested and usually more perceived risk; a lower cap rate means investors are paying up for safety, growth or location. The three steps:
- Gross annual rent: monthly rent times 12, less an allowance for vacancy.
- Net operating income: gross rent minus property taxes, insurance, repairs, management fees, utilities paid by the owner and reserves. Mortgage interest and depreciation are excluded.
- Cap rate: NOI divided by price. A property producing $13,930 of NOI on a $368,142 value has a 3.8% cap rate [1].
The cap rate can also be flipped to value a property: price equals NOI divided by the cap rate. If comparable buildings trade at a 6% cap rate and a property earns $30,000 of NOI, its implied value is $500,000.
Cap rate versus gross rent yield
Gross rent yield is annual rent divided by price, before expenses. It is quicker to compute but overstates the return. The cap rate is the more honest number because expenses on a single-family rental commonly consume 35% to 45% of rent once taxes, insurance, maintenance and vacancy are counted. The examples below assume 40% to keep the arithmetic simple; actual costs vary by property and by state tax levels.
Cap rate examples from 2026 city data
The table uses DataPorium's Zillow-based home value index (all homes, smoothed and seasonally adjusted) and rent index (all homes plus multifamily, seasonally adjusted) for June 2026, the latest month published before this article, from DataPorium's housing market insights [1]. NOI is set at 60% of gross rent.
| Market | Typical home value | Typical rent per month | Gross rent yield | Cap rate (NOI at 60%) |
|---|---|---|---|---|
| United States | $368,142 | $1,935 | 6.3% | 3.8% |
| Cleveland, OH | $120,690 | $1,376 | 13.7% | 8.2% |
| Chicago, IL | $329,405 | $2,319 | 8.4% | 5.1% |
| Austin, TX | $497,091 | $1,569 | 3.8% | 2.3% |
| San Jose, CA | $1,362,498 | $3,504 | 3.1% | 1.9% |
Source: DataPorium housing market data as of June 30, 2026 [1]. These are market-wide approximations: the value index covers all homes while the rent index covers rentals, and a specific property will differ. Still, the spread is striking. Cleveland's estimated cap rate of 8.2% is more than four times San Jose's 1.9%. Austin, where home values ran far ahead of rents during the last boom, shows a cap rate of 2.3% even after further price declines in the first half of 2026 [1].
Zillow's national rent report for June 2026 gives useful context: the typical U.S. asking rent was $1,965, up 2.2% from a year earlier, single-family rents were $2,320, and 39.7% of listings offered a concession such as a free month [2]. Slow rent growth and widespread concessions cap the NOI side of the formula, so cap rates cannot expand unless prices fall.
What is a good cap rate in 2026?
A cap rate is only good relative to the alternatives. The cleanest benchmark is the 10-year Treasury yield, which was 4.70% on August 11, 2026, while the 3-month bill paid 3.89% and the 30-year bond 5.24% [3]. A property is illiquid, needs management and carries vacancy and repair risk, so investors have historically demanded a premium of roughly 1.5 to 3 percentage points over the 10-year yield. That points to a target range of about 6% to 8% for a good residential cap rate in 2026.
By that standard, the national average of 3.8% and the coastal markets in the table offer less income than a Treasury bond, and buyers there are counting on rent growth or price appreciation rather than current yield [1][3]. Midwestern and some Southern markets clear the bar on income alone. The trade-off is growth: high cap rate cities often have slower population and job gains, so total return depends more on collecting rent than on price gains.
How investors use cap rates in practice:
- Screening: compare cap rates across cities before looking at individual listings. DataPorium's property finder and market pages help with the value and rent inputs [1].
- Financing test: if the mortgage rate is above the cap rate, borrowing lowers the cash return (negative leverage). The average 30-year fixed mortgage rate was 6.69% in the week of August 6, 2026, according to the Freddie Mac series on DataPorium's economic metrics page, far above the cap rates of the coastal markets in the table, so borrowing there reduces rather than increases the cash yield [4].
- Exit valuation: a small change in the cap rate moves value a lot. If NOI is fixed and the market cap rate rises from 5% to 6%, value falls about 17%.
- Risk check: a cap rate far above local norms may signal deferred maintenance, weak tenants or a declining area.
Investors may consider that lower property taxes, lighter regulation of landlords and faster permitting all raise NOI and therefore cap rates in a given market; states and cities that keep those costs down tend to attract private rental capital.
A cap rate is net operating income divided by price, and with the 10-year Treasury at 4.70% on August 11, 2026 a residential cap rate near 6% or higher is a reasonable definition of good.
Key takeaways
- Cap rate equals net operating income divided by property value; it is an unlevered yield before mortgage costs.
- Using June 2026 data and a 40% expense ratio, the typical U.S. home implies a cap rate of about 3.8%, Cleveland about 8.2% and San Jose about 1.9% [1].
- A good cap rate in 2026 should exceed the 10-year Treasury yield of 4.70% by a risk premium, so roughly 6% to 8% for residential property [3].
- Rent growth of 2.2% and concessions on 39.7% of listings limit NOI growth, so higher cap rates mostly require lower prices [2].
- Compare the cap rate with the mortgage rate before using leverage.
Frequently asked questions
What is a cap rate in simple terms?
It is the yearly profit a property produces after operating costs, divided by what the property is worth. A $400,000 property that nets $24,000 a year has a 6% cap rate.
What is a good cap rate for a rental property in 2026?
Roughly 6% to 8% for residential rentals, because the 10-year Treasury paid 4.70% as of August 11, 2026 and property carries extra risk and work [3]. Many large coastal cities fall well below that range.
Does the cap rate include the mortgage?
No. Cap rate uses net operating income before debt service. Cash-on-cash return is the measure that includes mortgage payments and the down payment.
Is a higher cap rate better?
A higher cap rate means more income per dollar invested, but it usually reflects more risk or slower growth. Cleveland's estimated 8.2% versus San Jose's 1.9% in June 2026 shows the trade-off between current yield and expected appreciation [1].
Sources & References
- [1] DataPorium Housing Market Insights (Zillow home value and rent indexes by city)
- [2] Zillow, Rent is ticking up, but so are the deals (June 2026 rent report, July 23, 2026)
- [3] U.S. Department of the Treasury, Daily Treasury Par Yield Curve Rates, August 2026
- [4] DataPorium Economic Metrics (30-year fixed mortgage rate, federal funds rate)
