How to Find Rental Properties With a Good Cap Rate

A good cap rate on rental properties is not as easy to come by as one would expect. It will ultimately depend on the location of the property.

Table of Contents

1. Finding Rental Properties With High Cap Rates
2. How to Find Rental Properties with a Good Cap Rate
3. Top Markets for Rental Properties With the Best Cap Rates
4. The Bottom Line

For many real estate investors, a cap rate is a good indicator of whether an investment property is profitable or not. Let’s find out more about cap rates and how they fit into the wonderful world of real estate investing.

Finding Rental Properties With High Cap Rates

A successful real estate investment is defined by how fast it gets its return on investment and how it generates profit through passive income after reaching the ROI. Typically, real estate investors use two major metrics to see a property’s profit potential, cash on cash return, and cap rate. 

Cash on cash return is simply taking a property’s net operating income (NOI) and dividing it by the amount of cash used to purchase the property. As our focus for our article is cap rates, you can check our article for more information about cash on cash return. 

What Is a Cap Rate? 

The uninitiated and uniformed typically use both cash on cash return and cap rate interchangeably. To them, the two terms are the same. While they do seem quite similar, they are also two different things. 

As mentioned above, cash on cash return rate is taking a property’s projected or actual NOI and dividing it by the cash used for property purchase. Take note that we’re talking about the actual money on hand and out-of-pocket that investors use to buy real estate property. It implies that the acquisition is not an all-cash transaction but one that requires minimal cash resources with the aid of financing. 

• Cash on Cash Return Formula: Net Operating Income/Total Cash or Out-of-Pocket Money Used to Invest in the Property

On the other hand, a cap rate basically takes the NOI and divides it against the property’s actual market value or purchase price. It does not take into account any financing options, but it implies that the property is bought in hard cash. 

• Cap Rate Formula: Net Operating Income/Property Price or Current Market Value

Dividing the NOI by the property price is not exactly recommended as it produces very inaccurate results, especially for homes bought at very low prices several years ago. Utilizing the property’s current market value paints a more realistic picture for people looking to invest now. 

Therefore, a good cash on cash return and a good cap rate are both important in determining how much profit a property can generate over a certain period. 

What Is a Good Cap Rate? 

Now, what is a good cap rate for real estate? Or, to make the discussion more focused, what is a good cap rate for rental property?

Regarding cash on cash return, experts agree that an 8% to 12% cash on cash return is considered great numbers. However, getting a property that generates an 8% return is already hard to come by nowadays. A property that can get at least a 1% cash on cash return rate is already a good starting point. But how does it work for cap rates? 

While there are higher standards for good cash on cash return, the standard for a good cap rate falls a bit lower. But it doesn’t take away any value from it. Keep in mind that cap rates involve all cash transactions, so the slightly lower measure for good cap rates makes sense. 

Generally, any number between 4% and 10% is considered reasonable where cap rates are concerned. And unlike cash on cash returns, a 4% cap rate is far more common than an 8% cash on cash return. 

Why Is Cap Rate Important in Real Estate Investing?

The main reason why investors should always consider cap rate real estate before investing is it gives them a more accurate projection of how much a property will earn in a year. It is a very efficient way to calculate the potential cash flows of different types of properties in different locations. It gives investors better insight into the properties they are considering and allows them to make extensive comparative studies. 

Investors, however, should keep in mind that cap rate isn’t the only metric they should go by. While cap rates do give folks a better understanding of a property, including its risks and gains, they don’t come in handy for other scenarios. Such scenarios include evaluating properties for house flipping, single-family units, and properties with irregular income. However, when it comes to commercial properties, they are very useful. 

Related: How To Secure Financing For Flipping Houses

How to Find Rental Properties With a Good Cap Rate

If you don’t already know, any type of investment involves a huge amount of research and analysis to ensure that the money directed towards it will give a decent return at the very least. It’s the same with real property investment. A significant amount of time and money should be dedicated to performing due diligence. It means getting all the necessary information and accurate market data to be used for calculating costs, expenses, and profits. 

The fun thing about investing in real estate today is that things are a lot easier and quicker with the aid of technology. Launched in 2014, Mashvisor is a real estate website that specializes in property analysis, helping thousands of real estate investors make the best investment decisions. Investors and real estate professionals use the platform to locate properties with top cash on cash return and cap rates in nearly every real estate market in the US. 

It is fairly easy to use with a very user-friendly interface that even novices will feel like an expert navigating the site. 

The website offers several handy investment tools that can help investors locate properties with the best possible cap rates. From traditional to vacation rental properties, as well as off-market and properties listed on the MLS, the investment tools can speed up the research and analysis process.

Property Finder

Once you’re logged in, all you need to do is enter the city, zip code, or area in the search field, and voila! You will be presented with a list of properties listed on the MLS that shows both cap rates and cash on cash returns. Toggle between the Investment, Airbnb, and Traditional tabs to see properties that fall under each of the categories. 

You can even sort the list out by clicking on the Sort By section in the upper right corner of the screen. It should include options to sort it by cap rate in ascending or descending order. 

Real Estate Heatmap

The huge map occupying the screen shows you the area of your search. You can zoom in or out to get a better overall view of the market. But the best thing about the said map is it also functions as a heatmap. You can use different filters to show you which areas are performing well (or poorly) given the filter used. 

Just click on the dropdown menu labeled Heatmap Dataset, and it should show you the following filters: 

• Traditional Cash on Cash Return
• Airbnb Cash on Cash Return
• Airbnb Rental Income
• Traditional Rental Income
• Listing Price
• Airbnb Occupancy Rate

While the dropdown menu doesn’t specifically include Cap Rate as a filter, generally, cap rates and cash on cash return show a 0.1% difference between them. Typically, cap rates are higher than cash on cash return rates. So if you use the Cash on Cash Return filter, it should give you a good idea of which areas are doing very well in terms of cap rates (based on the cash on cash return filter).

Keep in mind that the color-coded map represents a neighborhood’s performance level, red being poor and green being really good. In such a case, a neighborhood in green implies that rental properties in the area are doing very well where cash on cash return and cap rates are concerned. You can zoom in some more and choose a particular property to see the actual updated information. 

Investment Property Calculator

And lastly, there’s the investment property calculator. Mashvisor’s property calculator allows investors to crunch the numbers based on its massive and highly accurate database. The site’s calculator also comes with its own cap rate calculator, which makes calculating a property’s cap rate faster and more precise. 

But not only does Mashvisor’s calculator make doing the math easy. It also helps investors find the right investment properties, study accurate data, get access to reliable real estate comps, and come up with the best rental strategy. 

Related: Real Estate Calculator: What Are the Different Types and How Do They Help Investors?

Top Markets for Rental Properties With the Best Cap Rates

Let’s take a look at twenty of the best markets with a good cap rate, according to Mashvisor’s most recent database update. 

They are categorized into two: traditional and vacation rental properties. We specifically chose markets with more than a hundred listings each because they are the ones that provide a higher accuracy rate as far as rental data is concerned. 

Real estate investors should also take note that the price-to-rent ratio on traditional long-term rentals and occupancy rate for Airbnb properties should be taken into account when making investment decisions. 

A price-to-rent ratio is a metric used to indicate whether it’s more practical for folks to buy a property or rent one. It is divided into the following tiers: 

• Low score of 15 and below. This implies that property prices are relatively low compared to rental rates, which makes buying a property much more practical than renting one. 
• Medium score of 16 to 20. This shows that there is a good balance between property prices and rental rates. This means that people can go either way when it comes to real estate properties. 
• High score of 21 and above. A market with a high price-to-rent ratio means more people are likely to rent properties because of high market values on real estate. 

On the other hand, Airbnb occupancy rates play a significant role in a vacation rental property analysis. Along with a good cap rate, a healthy Airbnb occupancy rate realizes a property’s full income-generating potential. A high-occupancy low-vacancy rate means a higher monthly Airbnb rental income for an investor. It is why investors should also consider a neighborhood’s occupancy rate before making any final decisions. 

10 of the Best Traditional Rental Property Markets With High Cap Rates

After establishing the parameters for the following list, here are the ten best markets with a very good cap rate, from the highest to the lowest, according to Mashvisor. 

1. Chester, PA

• Median Property Price: $152,794
• Average Price per Square Foot: $106
• Days on Market: 60
• Number of Traditional Listings: 201
• Monthly Traditional Rental Income: $1,274
• Traditional Cash on Cash Return: 7.04%
• Traditional Cap Rate: 7.45%
• Price to Rent Ratio: 10 (low)
• Walk Score: 66

2. Camden, NJ

• Median Property Price: $160,736
• Average Price per Square Foot: $130
• Days on Market: 45
• Number of Traditional Listings: 157
• Monthly Traditional Rental Income: $1,320
• Traditional Cash on Cash Return: 6.55%
• Traditional Cap Rate: 6.95%
• Price to Rent Ratio: 10 (low)
• Walk Score: 61

3. Ventnor City, NJ

• Median Property Price: $438,225
• Average Price per Square Foot: $310
• Days on Market: 62
• Number of Traditional Listings: 192
• Monthly Traditional Rental Income: $3,436
• Traditional Cash on Cash Return: 5.59%
• Traditional Cap Rate: 5.69%
• Price to Rent Ratio: 11 (low)
• Walk Score: 60

4. Vero Beach, FL

• Median Property Price: $769,731
• Average Price per Square Foot: $311
• Days on Market: 72
• Number of Traditional Listings: 751
• Monthly Traditional Rental Income: $2,376
• Traditional Cash on Cash Return: 4.20%
• Traditional Cap Rate: 4.32%
• Price to Rent Ratio: 27 (high)
• Walk Score: 78

5. Warren, MI

• Median Property Price: $190,782
• Average Price per Square Foot: $311
• Days on Market: 48
• Number of Traditional Listings: 159
• Monthly Traditional Rental Income: $1,182
• Traditional Cash on Cash Return: 4.08%
• Traditional Cap Rate: 4.32%
• Price to Rent Ratio: 13 (low)
• Walk Score: 39

6. Dearborn Heights, MI

• Median Property Price: $242,558
• Average Price per Square Foot: $178
• Days on Market: 63
• Number of Traditional Listings: 245
• Monthly Traditional Rental Income: $1,380
• Traditional Cash on Cash Return: 4.02%
• Traditional Cap Rate: 4.21%
• Price to Rent Ratio: 15 (low)
• Walk Score: 60

7. Pasadena, TX

• Median Property Price: $233,957
• Average Price per Square Foot: $150
• Days on Market: 58
• Number of Traditional Listings: 453
• Monthly Traditional Rental Income: $1,480
• Traditional Cash on Cash Return: 3.99%
• Traditional Cap Rate: 4.15%
• Price to Rent Ratio: 13 (low)
• Walk Score: 74

8. Silver Spring, MD

• Median Property Price: $412,697
• Average Price per Square Foot: $287
• Days on Market: 44
• Number of Traditional Listings: 572
• Monthly Traditional Rental Income: $2,056
• Traditional Cash on Cash Return: 4.01%
• Traditional Cap Rate: 4.13%
• Price to Rent Ratio: 17 (medium) 
• Walk Score: 99

9. Odessa, TX

• Median Property Price: $313,602
• Average Price per Square Foot: $150
• Days on Market: 155
• Number of Traditional Listings: 419
• Monthly Traditional Rental Income: $1,689
• Traditional Cash on Cash Return: 3.94%
• Traditional Cap Rate: 4.09%
• Price to Rent Ratio: 15 (low)
• Walk Score: 53

10. Warner Robins, GA

• Median Property Price: $220,486
• Average Price per Square Foot: $125
• Days on Market: 75
• Number of Traditional Listings: 208
• Monthly Traditional Rental Income: $1,197
• Traditional Cash on Cash Return: 3.90%
• Traditional Cap Rate: 4.08%
• Price to Rent Ratio: 15 (low)
• Walk Score: 45

10 of the Best Vacation Rental Property Markets With High Cap Rates

According to Mashvisor’s latest data, here are the top Airbnb markets with high cap rates, arranged in descending order:

1. State College, PA

• Median Property Price:  $603,649
• Average Price per Square Foot: $248
• Days on Market: 198
• Number of Airbnb Listings: 269
• Monthly Airbnb Rental Income: $7,842
• Airbnb Cash on Cash Return: 8.68%
• Airbnb Cap Rate: 8.80%
• Airbnb Daily Rate: $494
• Airbnb Occupancy Rate: 52%
• Walk Score: 94

2. Bushkill, PA

• Median Property Price: $333,500
• Average Price per Square Foot: $158
• Days on Market: 50
• Number of Airbnb Listings: 109
• Monthly Airbnb Rental Income: $4,327
• Airbnb Cash on Cash Return:  8.05%
• Airbnb Cap Rate: 8.26%
• Airbnb Daily Rate: $329
• Airbnb Occupancy Rate: 52%
• Walk Score: 0

3. Coachella, CA

• Median Property Price: $373,889
• Average Price per Square Foot: $261
• Days on Market: 113
• Number of Airbnb Listings: 111
• Monthly Airbnb Rental Income: $4,677
• Airbnb Cash on Cash Return: 7.91%
• Airbnb Cap Rate: 8.07%
• Airbnb Daily Rate: $597
• Airbnb Occupancy Rate: 38%
• Walk Score: 63

4. Nashville, IN

• Median Property Price: $432,940
• Average Price per Square Foot: $276
• Days on Market: 82
• Number of Airbnb Listings: 156
• Monthly Airbnb Rental Income: $4,639
• Airbnb Cash on Cash Return: 7.86%
• Airbnb Cap Rate: 8.05%
• Airbnb Daily Rate: $276
• Airbnb Occupancy Rate: 59%
• Walk Score: 56

5. White Settlement, TX

• Median Property Price: $250,505
• Average Price per Square Foot: $173
• Days on Market: 6
• Number of Airbnb Listings: 107
• Monthly Airbnb Rental Income: $3,207
• Airbnb Cash on Cash Return: 7.54%
• Airbnb Cap Rate: 7.80%
• Airbnb Daily Rate: $145
• Airbnb Occupancy Rate: 61%
• Walk Score: 42

6. Berkeley Springs, WV

• Median Property Price: $406,731
• Average Price per Square Foot: $199
• Days on Market: 74
• Number of Airbnb Listings: 144
• Monthly Airbnb Rental Income: $4,146
• Airbnb Cash on Cash Return: 7.61%
• Airbnb Cap Rate: 7.79%
• Airbnb Daily Rate: $215
• Airbnb Occupancy Rate: 67%
• Walk Score: 5

7. Wisconsin Dells, WI

• Median Property Price: $277,233
• Average Price per Square Foot: $165
• Days on Market: 33
• Number of Airbnb Listings: 278
• Monthly Airbnb Rental Income: $3,176
• Airbnb Cash on Cash Return: 7.50%
• Airbnb Cap Rate: 7.76%
• Airbnb Daily Rate: $341
• Airbnb Occupancy Rate: 46%
• Walk Score: 69

8. Luray, VA

• Median Property Price: $480,243
• Average Price per Square Foot: $209
• Days on Market: 223
• Number of Airbnb Listings: 212
• Monthly Airbnb Rental Income: $4,562
• Airbnb Cash on Cash Return: 7.44%
• Airbnb Cap Rate: 7.62%
• Airbnb Daily Rate: $272
• Airbnb Occupancy Rate: 60%
• Walk Score: 52

9. Sweetwater FL

• Median Property Price: $431,111
• Average Price per Square Foot: $353
• Days on Market: 55
• Number of Airbnb Listings: 319
• Monthly Airbnb Rental Income: $4,717
• Airbnb Cash on Cash Return: 7.30%
• Airbnb Cap Rate: 7.46%
• Airbnb Daily Rate: $154
• Airbnb Occupancy Rate: 56%
• Walk Score: 82

10. Broadview, IL

• Median Property Price: $253,900
• Average Price per Square Foot: $211
• Days on Market: 65
• Number of Airbnb Listings: 249
• Monthly Airbnb Rental Income: $3,336
• Airbnb Cash on Cash Return: 7.19%
• Airbnb Cap Rate: 7.42%
• Airbnb Daily Rate: $128
• Airbnb Occupancy Rate: 64%
• Walk Score: 61

The Bottom Line

Investors with a clear understanding of cap rate know when to use it and what its limitations are. While cash on cash return is typically recommended for single-family homes, cap rates can be used for evaluating other real estate investments, especially commercial properties.

A good cap rate can be a good indicator of an investment property’s potential. However, make sure you also check out all the other important metrics and relevant factors. It is better to keep your bases covered to increase your chances of success. 

To get access to Mashvisor’s real estate investment tools, click here to sign up for a 7-day free trial today, followed by 15% off for life.