# Understanding Cap Rate: A Real Estate Investor's Guide to Yield By August Wong (@augustwong) · Published 2026-11-06 Canonical: https://voce.com/@augustwong/understanding-cap-rate-real-estate-investor-guide-kqii94 --- Cap rate — short for capitalization rate — is the single most important number on a buy-and-hold rental property, because it answers the only question that matters before you sign: _what yield does this building actually produce on the money you put in?_ In South Florida, where I work as a Realtor, investors are looking at a **Broward multifamily average around 5.6%** ([Florida Commercial Group](https://serhantfloridacommercialgroup.com/blog/where-fort-lauderdale-multifamily-actually-pencils-in-2026)) and asking whether that beats parking their cash in the S&P 500. It can — but only if you understand what cap rate does and does not measure. This guide walks through the math on a single-family house and a fourplex, then compares rental yield against the stock market. #### Key Takeaways - Cap rate = net operating income ÷ purchase price, a pure cash-on-price yield before financing. - A real cap rate includes every operating cost — property taxes, insurance, management, maintenance — not just rent. - South Florida single-family and multifamily assets trade in the 4.8%–6.3% range, far below the stock market's long-run ~10% total return. - Cap rate ignores appreciation and leverage; use IRR or cash-on-cash when financing and growth matter. ## What is cap rate — and what does it actually tell you? The cap rate is the annual net income a property produces divided by its purchase price, expressed as a percentage. Think of it as the yield on a rental, the way **dividend yield** is the yield on a stock: it tells you how much cash the asset throws off each year relative to what you paid. A 6% cap rate means the property returns $6 of net operating income for every $100 of price, before any mortgage is involved. The strength of cap rate is that it lets you compare assets that would otherwise be apples and oranges — a single-family house in Fort Lauderdale versus a fourplex in the same neighborhood, or a rental building versus a stock. Because the formula strips out financing, it measures the property itself, not your particular loan. When I run numbers with investors, I start here precisely because it forces everyone to face the operating cost side of the deal rather than just the rent column. ## How the math works: NOI divided by price Every cap rate comes from the same two numbers: **net operating income** (NOI) and purchase price. NOI is everything the property collects in rent, minus everything it costs to run — vacancy, property taxes, insurance, property management, repairs, and utilities you cover. It deliberately leaves out the mortgage payment. The formula is simple: **Cap Rate = Net Operating Income ÷ Purchase Price** The reason the mortgage is excluded matters more than it looks. A cap rate measures the asset, not your financing. Whether you borrow at 6% or pay cash, the cap rate stays the same — so it becomes a clean way to compare one building to another, and to compare buildings against other investments like stocks, before you decide how you'll pay for it. ## Example: a single-family rental in Fort Lauderdale Let's run the numbers on a typical single-family rental. Fort Lauderdale's single-family median price climbed to roughly **$578,000** in 2026 (Miami Real Group), but a buy-and-hold investor chasing yield usually buys below that, so I'll model a **$450,000 house** renting for **$3,200 a month**. Here's the full annual operating picture, with realistic South Florida costs: Line item Monthly Annual Gross rental income $3,200 $38,400 Vacancy (one month at ~8%) — −$3,100 Property taxes — −$7,500 Insurance (wind + flood) — −$6,000 Property management (8%) — −$3,100 Maintenance and repairs — −$3,000 **Net operating income** — **$15,700** Two things worth flagging before you take these numbers anywhere. First, like the fourplex example, this **$450,000 house at $3,200 a month is a modeled assumption**, not a specific listing — I chose it to sit below the roughly $578,000 median so the yield math is readable. Second, the net operating income checks out if you read the table as a stack: gross rent of $38,400, then each line item (vacancy $3,100, taxes $7,500, insurance $6,000, management $3,100, maintenance $3,000) is subtracted in sequence. Added together those five costs come to $22,700, and $38,400 minus $22,700 is $15,700. Divide that NOI by the $450,000 purchase price and you get a **cap rate of about 3.5%** — the single-family example's answer to the fourplex's 2.5%. ![A single-family rental house](https://images.unsplash.com/photo-1650772263831-41aa1b2c80d0?crop=entropy&cs=tinysrgb&fit=crop&fm=jpg&ixid=M3w5Mzk0NDN8MHwxfHNlYXJjaHwxfHxzaW5nbGUlMjBmYW1pbHklMjByZW50YWwlMjBob3VzZSUyMGV4dGVyaW9yfGVufDB8MHx8fDE3OTM3MzU2OTV8MA&ixlib=rb-4.1.0&q=80&w=1200&h=630) ## Example: a fourplex, and why scale changes the rate Now let's compare a $1.2 million fourplex — four units renting for $1,800 each a month, the kind of small multifamily that anchors workforce-housing demand in inland Broward. To make the math transparent, these rent and expense figures are illustrative hypotheticals, not a specific listing. What matters is the relationship they reveal: at a given price, every extra dollar of insurance, vacancy, or maintenance directly shrinks the cap rate. Line item Annual Gross rental income (4 × $1,800 × 12) $86,400 Vacancy (~7%) −$6,000 Property taxes −$16,000 Insurance (wind + flood) −$18,000 Property management (8%) −$6,900 Maintenance, utilities, reserves −$9,500 **Net operating income** **$30,000** A 2.5% cap rate signals one of three problems: the price is too high for the rent it can command, the units are under-rented, or operating costs are eating the yield — and in South Florida, the usual culprit is the insurance tax. When wind and flood premiums soak up the kind of dollars shown above, a fourplex that pencils at 2.5% is really a property yielding far less than a Treasury bond. For a local buyer, a healthy spread means **aiming at the market average of 5.6% or better** before leverage, and treating anything below 4% as a red flag that the numbers only work if appreciation — not cash flow — does the heavy lifting. That spread between roughly **4.8%–6.3%** in South Florida and the stock market's long-run ~10% total return looks like a win for stocks on paper — but the two numbers measure different things. The 10% figure bundles price growth (the S&P 500's appreciation) into the return, while a cap rate is a pure income yield: it captures only the cash the building throws off, not the land's appreciation. For a buy-and-hold investor, rental yield can still win because the gap is filled by the levers cap rate ignores — **depreciation tax shelter, mortgage leverage, and principal paydown**, none of which show up in a 10% stock benchmark. A 5.6% cap rate financed with a 6% fixed loan, where tenants pay down your principal and write off your depreciation, is a different wealth-building machine than a passive index fund. That's why, for my clients, the comparison is never cap rate versus stocks outright — it's what each asset does _after_ the raw yield is on the table.