Cap Rate Calculator

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What Is a Cap Rate?

Cap rate measures the annual return on a property if you paid all cash. It strips out financing so you can compare properties on equal footing. A $150,000 duplex generating $12,600 in net operating income has an 8.4% cap rate. A $300,000 duplex generating the same $12,600 has a 4.2% cap rate. Same income, half the return on your money.

The formula is straightforward: Net Operating Income divided by Purchase Price, multiplied by 100. NOI is your gross rental income minus all operating expenses (taxes, insurance, maintenance, management fees, vacancy). Mortgage payments are not included because cap rate measures the property's performance independent of how you finance it.

In Memphis, most single-family rentals trade between 6% and 10% cap rates depending on the neighborhood and property condition. A property at 5% in East Memphis and a property at 10% in Binghampton are not the same risk. Cap rate is a starting point, not the whole picture.

Cap Rate vs. Cash-on-Cash Return

Cap rate assumes you paid all cash. Cash-on-cash return measures the return on the actual dollars you invested, including your down payment and financing costs. If you put $37,500 down on a $150,000 property and net $4,200/year after mortgage payments, your cash-on-cash return is 11.2% even though the cap rate is 8.4%. Leverage amplifies returns when the math works and amplifies losses when it does not.

Memphis Cap Rates by Area

Higher cap rates in Binghampton and similar areas reflect higher perceived risk: older housing stock, more tenant turnover, and maintenance costs that can eat into returns quickly without experienced management. Lower cap rates in East Memphis reflect stable tenants, lower maintenance, and appreciation upside. Neither is inherently better. It depends on your goals, your risk tolerance, and whether you have the management infrastructure to handle the property.