How to Calculate Cap Rate, Gross Yield and Net Yield: A Duplex Example

How to calculate cap rate sounds like one question, but most disagreements between landlords come down to which ratio they are quoting. Gross yield flatters, cap rate sobers, cash-on-cash tells you what your bank account will see. This guide sets out the formulas, which costs each ratio counts, the 2026 figures behind them, the traps in listings, and one hypothetical Los Angeles duplex carried from rent to return. Rent is the numerator of every ratio here, so settle that number first with the pillar article on how much you can rent your house for, with methods and data sources.

Three ratios, one question: how much income per dollar of price

NOI and cap rate ignore how the purchase is financed, which makes them comparable across buyers: a fourplex bought with cash and the same fourplex bought with 75 percent debt have the same cap rate. Cash-on-cash brings the loan back in, and with it the question this article keeps returning to: does the property earn more than the money costs?

Gross yield: the formula, and how to read it when rents are falling

Gross yield is twelve months of rent divided by the price: two one-bedroom units at $1,700 each bring in $40,800 a year, 9.1 percent of a $450,000 building. It ignores everything that costs money, which suits it to two jobs only: discarding listings that cannot work at any expense ratio, and comparing markets with similar taxes and insurance.

The rent in the numerator deserves more care than it gets. Asking rents are not achieved rents, and in 2026 the gap runs against owners: in Realtor.com's rental report for August 2026 the median asking rent for units of up to two bedrooms across the 50 largest metros was $1,699, $16 (0.9 percent) less than twelve months before and the 37th month in a row of year-over-year declines, while 43.5 percent of listings offered a concession; Los Angeles-Long Beach-Anaheim came in at $2,785, down 1.6 percent². The official cross-check is HUD's Fair Market Rent, an estimate of the 40th percentile gross rent for standard quality units in a metropolitan area or nonmetropolitan county, effective each October 1³. Four in ten comparable units rent below that line, so a yield that only works at a rent far above it assumes the unit will lease near the top of its market.

Net yield and NOI: the expense lines first-time landlords forget

Net operating income is where a listing's story meets the building's costs, and the cleanest checklist of those costs is the IRS's list of deductible rental expenses in Publication 527: advertising, cleaning and maintenance, insurance, legal and professional fees, management fees, mortgage interest, repairs, taxes, utilities and depreciation⁴. For NOI, strike two items. Mortgage interest goes because NOI describes the building, not your loan. Depreciation goes because it is not cash: the general depreciation system spreads a residential rental building over 27.5 years, the alternative system over 30, straight-line with a mid-month convention⁵⁴, lowering taxable income without changing what the building costs to run.

Four lines move NOI more than the others.

Vacancy. No unit is rented 365 days a year. By the Census Bureau's count, 7.3 percent of the nation's rental units stood empty in the second quarter of 2026, up from 7.0 percent a year earlier⁶; your submarket may be tighter or looser, but zero is never the right assumption.

Property tax. The Tax Foundation's county table for 2026, built from 2024 Census figures, runs from 0.31 percent of home value in Honolulu County, Hawaii, to 1.89 percent in Cuyahoga County, Ohio; Maricopa County, Arizona, sits at 0.44 percent, Los Angeles County at 0.67 percent and Atlantic County, New Jersey, at 1.86 percent⁷. Those effective rates describe what existing owners pay on older assessed values. A buyer should budget the county's rate on the purchase price rather than copy the seller's last bill.

Insurance. Between 2018 and 2022 the average premium per policy outran inflation by 8.7 percent, according to the Treasury's Federal Insurance Office, and the fifth of ZIP codes with the highest expected climate losses paid $2,321 a year on average, 82 percent above the lowest-risk fifth⁸. Get a quote for the address; last year's bill is not a forecast.

Repairs and reserves. Roofs and water heaters do not fail on schedule; an honest NOI carries a reserve line even in a year nothing breaks. Every line of that budget is itemized in the cost of owning a home guide. Net yield is NOI divided by everything you paid to own the building, closing costs included: the return with no loan at all.

How to calculate cap rate, and what counts as good in 2026

Cap rate is NOI divided by the price or the value, and it runs in both directions. Given a price, it is the building's return before any loan. Given a market cap rate from recent sales of similar rentals, NOI divided by that rate is a value; that is how investors and appraisers price apartment buildings and how a landlord keeps several units on one footing, as the guide to valuing a rental portfolio explains.

There is no fixed good cap rate, but there is a fixed test: the cost of borrowing. On September 24, 2026 the 30-year fixed averaged 7.03 percent in Freddie Mac's weekly survey, 0.73 points above its reading of a year before, and the 15-year 6.42 percent¹. A cap rate above the loan rate means each borrowed dollar adds to your return on equity; a cap rate below it means each borrowed dollar subtracts, and the more you borrow the worse the cash-on-cash figure gets. That is why a 5 percent cap rate can be a sound purchase with cash and a losing one with 75 percent debt. The Federal Reserve's May 2026 Financial Stability Report notes that house price-to-rent ratios dropped slightly but stayed elevated across geographic areas, while commercial real estate capitalization rates have recovered from their 2022 lows to just below their historical average⁹. Prices that stay high relative to rents mean low cap rates on houses, whatever the listing promises.

Cash-on-cash return and ROI: what changes once you borrow

Cash-on-cash return is the pre-tax cash flow after loan payments divided by the cash you invested: down payment, closing costs, initial repairs. It is the one figure that describes your money rather than the building.

The ratios line up according to the spread. With no loan, cash-on-cash equals net yield; with a loan cheaper than the cap rate it rises above the cap rate; with a loan that costs more than the cap rate it falls below and can turn negative while NOI stays positive. Two more figures matter. The debt service coverage ratio, NOI divided by annual loan payments, is what a lender reads; below 1.0 the rent does not cover the mortgage. And the tax result differs from the cash result: interest and depreciation⁴⁵ are deductible while principal is not, so a building can show a paper loss in a year it produced cash, or the reverse. This is general information, not legal or tax advice.

Benchmarks and traps: the 1 percent rule, GRM and the vacancy line

The 1 percent rule. Monthly rent should equal at least 1 percent of the price, says the rule. Take the C.A.R. figure for Los Angeles County in August 2026, a $946,950 median for an existing single-family house¹⁰: the rule asks for roughly $9,470 a month, a rent no ordinary house in the county achieves. It comes from cheap markets, where a house sells for a handful of years' rent, and it is silent on taxes, insurance and vacancy; two properties that pass it can sit more than a point and a half apart in cap rate on property tax alone (0.31 percent of value in Honolulu County against 1.89 percent in Cuyahoga County⁷).

Gross rent multiplier. Price divided by annual rent: the duplex above has a GRM of about 11 ($450,000 ÷ $40,800). It is gross yield upside down, with the same blind spots; sort listings with it, then stop using it.

The vacancy assumption. The most common way to inflate a yield is to assume full occupancy and this year's asking rent forever. With asking rents lower than a year earlier² and more than 7 percent of rental units empty⁶, the conservative worksheet uses today's achieved rent, a vacancy line at or above the national figure, and no rent growth at all.

A $450,000 Los Angeles duplex: 9.1 percent gross, 4.7 percent cap rate

Every figure below is a hypothetical example. The price is illustrative: the county's median existing single-family house sold for $946,950 in August 2026¹⁰, so a $450,000 duplex would be an older building in one of the cheaper ZIP codes, bought with work to do. Two one-bedroom units, each leased at $1,700 a month, a shade under HUD's FY2026 Small Area Fair Market Rent of $1,720 for a one-bedroom unit in ZIP code 90003³.

Now the ratios, on a purchase with 25 percent down ($112,500) and $9,000 of closing costs, so $121,500 of cash invested, and a $337,500 loan at the 7.03 percent survey rate over 30 years¹.

The lesson is in the last two rows. A 9.1 percent gross yield looked generous, the 4.7 percent cap rate is ordinary, and because that cap rate sits 2.3 points below the loan rate, borrowing three-quarters of the price turns a building that earns $21,296 into one that costs its owner $5,730 a year. Paid in cash, the same duplex returns 4.6 percent plus whatever the market does to its value. For the cap rate to match today's 7.03 percent loan rate, the price would have to fall to about $303,000 (NOI ÷ 0.0703); for the financed purchase merely to stop losing cash at 75 percent debt, to about $355,000, or else the rents would have to rise by roughly a sixth with no added cost. Tax softens the cash loss: first-year interest of about $23,600 and a year's depreciation of about $11,450 on a $315,000 building share⁴⁵ (land is not depreciable) produce a paper loss larger than the cash loss, usable against other income only in some owners' situations. This is general information, not legal or tax advice.

Rent, gross yield and the cost lines the report feeds into the worksheet

A CheckValue report for one address feeds three parts of the worksheet above. The rent estimate and gross yield give you the top line and the first ratio, computed against the market value the report derives from comparable sales and the official price index, so rent and value come from one source instead of a listing and a hunch. The ownership costs section supplies the running-cost lines gross yield leaves out, with their official sources, most of the distance from gross to net. And the selling costs and net proceeds section covers the exit, what a sale would leave after costs, without a second report.

What the report leaves to you: it does not know your loan, your closing costs or the leases in place, so the cap rate, the coverage ratio and the cash-on-cash return are still your arithmetic, and nothing in it is an appraisal a lender would accept. Run the rent estimate and gross yield for the address in the free preview; landlords who evaluate several buildings a month will find the report packs and the Pro plan on the pricing page.

Using the ratios to decide: buy, hold or sell

Buying. Screen with gross yield, decide with cap rate against the loan rate¹, and confirm with cash-on-cash at the financing you will actually use. A negative spread is not automatically a no; it is a decision to buy appreciation and pay for it monthly, made on purpose.

Holding. Recompute the cap rate every year on current value, not on what you paid. A building bought at an 8 percent cap rate in 2012 that would sell at 4.5 percent today is earning 4.5 percent on the equity trapped in it.

Selling. When the cap rate on current value falls well below what the same equity would earn elsewhere, and rents are flat or falling as they were nationally in August 2026², the question is no longer whether the building is profitable but whether the equity is. The rent it out or sell guide sets the two paths side by side with numbers.

This article is general information, not legal, tax or investment advice. Figures and rules carry the year they were published; check the cited source for the current version.

Josef Eckmair MBA

Co-founder, CheckValue · Managing director, CBDNOL GmbH · More than 20 years in real estate in Tenerife and Austria · Reviewed by Christian Eckmair

Josef Eckmair MBA is co-founder of CheckValue and managing director of CBDNOL GmbH (Ansfelden, Austria). He has more than 20 years of real estate experience in Tenerife and Austria and writes about appraisals, taxes, selling costs and valuations for professionals.

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