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What Is Cap Rate and How Do I Calculate It?

Patrick Kevin Fagan Patrick Kevin Fagan Updated August 18, 2026

Cap rate (capitalization rate) measures a property's annual return relative to its purchase price. Formula: Cap Rate = (Annual Net Operating Income / Purchase Price) x 100. A $300K property generating $24K NOI has an 8% cap rate. Higher cap rates mean higher potential returns but often in less desirable areas. In San Antonio, residential cap rates typically range from 5-8%.

Cap Rate Formula (With Example)

The cap rate formula is simple: Cap Rate = Net Operating Income / Purchase Price. For example, if a duplex generates $2,500/month in rent ($30,000/year) and has $6,000/year in operating expenses (taxes, insurance, management, maintenance), the NOI is $24,000. If the purchase price is $300,000, the cap rate is 8% ($24,000 / $300,000).

How to Calculate NOI (Rent Minus Expenses)

Net Operating Income is your gross rental income minus all operating expenses. Expenses include property taxes, insurance, property management (8-10%), maintenance (5-10% of rent), vacancy (5-10%), HOA fees, and utilities you pay. Do not include mortgage payments — NOI is calculated before debt service.

What Cap Rate Tells You (Return Indicator, Not Cash Flow)

Cap rate is a measure of potential return, not actual cash flow. A higher cap rate suggests higher potential return but also higher risk. A lower cap rate suggests a more stable, lower-risk investment. Cap rate is most useful for comparing similar properties in the same market.

Cap Rate vs Cash-on-Cash Return

While cap rate measures return on the full purchase price, cash-on-cash return measures return on your actual cash invested. An 8% cap rate property with 25% down might give you a 12% cash-on-cash return because your investment is only the down payment, not the full price. Cap rate ignores financing, which is a limitation.

How to Compare Properties Using Cap Rate

When comparing properties, use cap rate as a starting point. A 6% cap rate in a stable neighborhood might be better than a 9% cap rate in a declining area. Look at cap rates for similar properties in the same area to understand what is normal for that market.

San Antonio Market Context

In the San Antonio market, residential cap rates typically range from 5-8%. Properties in established neighborhoods like Stone Oak or Alamo Heights tend to have lower cap rates (5-6%) but more stable appreciation. Properties in developing areas or near military bases may have higher cap rates (7-8%) with more growth potential.

Patrick's Take

"Cap rate is a great starting point but not the whole story. I always calculate cash-on-cash return too, because cap rate doesn't account for your financing. A property with a 6% cap rate might yield 15%+ cash-on-cash return if you put only 25% down with a low rate."
PF
Patrick Kevin Fagan
Patrick Kevin Fagan

Patrick Kevin Fagan

Loan Officer and Realtor · AXEN Realty LLC

Patrick Kevin Fagan is a dual-licensed real estate agent and mortgage loan originator with over 23 years of experience helping buyers throughout Texas. He specializes in first-time homebuyer education and loan strategy.

Ready to Analyze Investment Properties?

Patrick can help you calculate cap rates and find properties that match your investment goals.

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