Cap rate (capitalization rate) is net operating income divided by purchase price. It tells you the unleveraged return a property generates. A $300,000 property producing $18,000 NOI has a 6% cap rate. It's the most common metric for comparing rental properties because it strips out financing and gives you an apples-to-apples comparison.

What is a good cap rate for rental property?

For residential rentals, 5-8% is generally considered solid. Above 8% is excellent but often comes with higher risk (rougher neighborhoods, older buildings, declining markets). Below 5% is common in expensive metros where investors rely more on appreciation than cash flow.

How is cap rate different from cash-on-cash return?

Cap rate ignores financing — it measures the property's return as if you paid all cash. Cash-on-cash return measures your actual return on the cash you invested, factoring in your mortgage. A property with a 6% cap rate could yield a 12% cash-on-cash return with leverage.

What is the 1% rule in real estate?

The 1% rule says monthly rent should be at least 1% of the purchase price. A $200,000 property should rent for at least $2,000/month. It's a quick screening tool — many successful rentals don't pass the 1% rule, especially in higher-priced markets.

What is the BRRRR strategy?

BRRRR stands for Buy, Rehab, Rent, Refinance, Repeat. You buy a distressed property below market value, renovate it, rent it out, then do a cash-out refinance based on the new appraised value to pull out most or all of your original capital and repeat the process.

Where does CapRateCity get its data?

Our city-level data draws from publicly available sources including U.S. Census Bureau population and income figures, Zillow Home Value Index for median prices, HUD Fair Market Rents, and state/county tax assessor records. Data is updated periodically.

What does PITI stand for?

PITI stands for Principal, Interest, Taxes, and Insurance — the four components of a typical monthly mortgage payment. Principal and interest are paid to the lender; taxes and insurance are typically escrowed and paid by the lender on the borrower's behalf. PITI is the standard payment figure lenders use for qualification math (debt-to-income ratios).

How is the principal-and-interest portion of a mortgage calculated?

Use the amortization formula M = P × r(1+r)^n / ((1+r)^n − 1), where P is the loan amount, r is the monthly interest rate (annual rate ÷ 12), and n is the total number of monthly payments (years × 12). For a $300,000 loan at 7% for 30 years: r = 0.005833, n = 360, M = $1,995.91 per month before taxes and insurance.

What is PMI and when do I have to pay it?

Private mortgage insurance (PMI) is required when you put down less than 20% on a conventional loan. PMI typically costs 0.3%–1.5% of the loan amount per year, charged monthly. It automatically cancels at 22% equity (78% loan-to-value) on owner-occupied conventional loans, or you can request cancellation at 20% equity.

Do investment property mortgages have different rates than primary residences?

Yes. Investment property rates typically run 0.5%–1% higher than owner-occupied rates because lenders consider rental property loans riskier (default rates spike during downturns). Down payment requirements are also higher — typically 20%–25% minimum for investment property conventional loans, vs. 3%–5% minimum for primary residences.

Should I pay points to lower my mortgage rate?

It depends on your hold period. One point (1% of the loan amount) typically lowers the rate by 0.25%. Divide the upfront cost by the monthly savings to get the break-even period. If you'll hold the property longer than the break-even, points pay off; if you might sell or refinance sooner, skip them and keep the cash.

How do property taxes factor into my monthly payment?

Property taxes are calculated annually (purchase price or assessed value × local effective tax rate) and typically divided by 12 to add to the monthly payment. Tax rates vary widely — under 0.5% in Hawaii and parts of the South, over 2% in New Jersey, Illinois, and Texas. The exact rate for any city is shown on its per-city CapRateCity page.