Why Don’t We Talk “Cap Rate” in Single-Family Residential Real Estate Investing?

, Mar 29, 2023


Pretty regularly, I will have a prospective real estate investor ask me about cap rate. They’ll want to know the Cap Rate on a particular property, or what a good Cap Rate is for the Austin area. Right away, I know they are coming to me from the world of commercial real estate and are probably new to the residential investment market. I know I’ll probably have to do a bit of educating to show them that cap rate has no use in the world of residential real estate. The reason: Repairs.

But first, what is Cap Rate and why does it matter? Capitalization rate, or Cap Rate, is a popular tool used by commercial real estate investors. It’s the ratio between the annualized net operating income (NOI) and the current fair market value (FMV) of that property. The calculation is simple:


Since most commercial leases are triple-net, meaning the tenant bears the burden of most expenses, including most repairs, the landlord’s operating expenses tend to be pretty stable and predictable from year to year. This makes Cap Rate easy to calculate for individual properties, and makes it a decent, albeit very blunt tool for comparing those properties to one another.

Triple-net leases are not used in residential real estate. That makes the landlord, not the tenant, responsible for big ticket repairs. Since all single family residential homes have major systems that require expensive maintenance and repairs at some point, and since none of these can be reliably predicted from year-to-year, it’s impossible to know what the operating expenses will be for any given year. If you don’t know that number, you don’t know your NOI. If you don’t know that, you can’t calculate a Cap Rate.

There is a tool similar to Cap Rate that I use in the world of residential real estate investing: Rent Ratio. The calculation is quite similar:


Like Cap Rate, Rent Ratio is a blunt tool used to evaluate individual properties or compare properties within or between markets. Unlike Cap Rate, it does NOT take into account any expenses whatsoever. This is a huge variable that should be considered separately. If a property has an acceptable Rent Ratio, and seems worthy of additional scrutiny, you’ll want to look immediately into the age of the property and the overall condition of its major systems so you can get an idea of what future repairs might look like as a part of your total analysis.


About the Author

Last updated: 03/29/2023

2300+ Client reviews!

We did it! With Meaghan’s help we were able to sell my home in this crazy market. When it came time to list my home I didn’t hesitate to reach out to her as she was the one who helped me purchase it. Working with Meaghan is easy, despite the market throwing many challenges she stayed the course and adjusted as the housing market rapidly changed landscapes. If you are looking for a Realtor who will take the time to listen to what is needed when it comes to buying OR selling… She’s it. I’m grateful for her patience, the way in which she works with others and the time she takes to care for the well being of her clients. A gem in a crowded Realtor arena. Thank you Meaghan Marks for always looking out!!!

We worked with Elizabeth Michael for over a year to prepare our home for sale. She was kind and patient, but most of all she was very knowledgeable and thorough. It’s a long and at times arduous process preparing a home to list, but with her help we were able to optimize the space with staging and address the minor concerns that came up in our pre-listing inspection. I highly recommend her for your next sale or home purchase!

Vicki went above and beyond to ensure our experience of purchasing a new home remotely went as smooth as possible. I can’t tell her thank you enough!

Our family was very fortunate to have Linda Baddour at Bramlett as our realtor. She worked hard to sell our house quickly and for a great price, and was very diligent in finding us our new perfect home for our family. Linda was friendly, attentive and responsive throughout our home selling and buying process, and we would highly recommend her.

We worked with Robin Deshotels, and it was an absolute pleasure. She was extremely knowledgeable, friendly, and helpful, especially since we were first-time homebuyers. Highly recommend!

Working with Vikki Davis was an absolute pleasure. They were professional, responsive on the weekends, and incredibly knowledgeable about the market. They made the entire process seamless, from finding listings that matched my criteria to negotiating a great deal. I couldn’t be happier with my new home and highly recommend Vikki to anyone looking for top-notch real estate service!

My family and I were so lucky to find Nancy at Eric Bramlett. She happened to be covering for another agent when we first toured a home of our interest, but we were so happy that she ended up being the one to work with us! My mother is not the easiest to work with, but Nancy immediately connected with her and has been so incredibly patient and kind along this journey. Nancy always provided us the best and most up to date information on the market and our prospective homes. She drove wherever we needed her to be at a time that was always convenient for us. Through this time, we’ve been so lucky to get to know her, and she is one of the sweetest individuals we’ve had the pleasure to meet. I’m sure we’ve also made a lifelong friend through this experience 🙂 Will 100% recommend this real estate company and Nancy to all our good friends and family looking for a home!

My husband and I worked with Kasey Gilliam and Kim Jowers to find our first home. We had no idea where to start, but they were able to smoothly guide us through the entire process. We are super grateful they were able to share their extensive knowledge with us. They were able to answer any questions we had no matter how silly they were. We will definitely be working with them again in the future and will be referring them to friends & family searching for a home in the Austin area!

Our agent Patrick Hallett is an excellent communicator – warm demeanor, quick to respond, and clear communication. His knowledge of the market immediately gave us confidence that he would guide us in the right direction. We also had good experiences with the inspector and lender he recommended. Our process was quick and smooth with Patrick’s guidance

Meaghan Marks was not only my realtor, but my biggest advocate and support while selling 2 of my homes at the same time. I had never sold a house before, so having a realtor that held my hand was very important to me. There were struggles with the buyers, and she walked me through all the lingo and curveballs along the way, allowing me to ultimately make the best decisions for ME and my situation. Throughout the process, Meaghan not only was patient and professional, but she was kind and fun to be around, making the stressful seem seamless. If you want a friend who has your back and helps you navigate buying or selling a home, Meaghan is your girl!

Tammy was so helpful during our home buying process. We really appreciated how invested she was in us finding our first home. Would definitely recommend!

Selling our house with Bramlett Residential was a great experience. Our realtor, Craig, was not only patient and thoughtful but also an expert in our neighborhood. Throughout the process, he served as our advocate, ensuring we felt confident and supported every step of the way. Craig was a true professional, prioritizing our needs and concerns. He and the team took a lot of the stress out of the process.. I wholeheartedly recommend Bramlett Residential to anyone looking to buy or sell a home.

Click Here to Read All Reviews