What is a good cap rate for rental property?

A good cap rate depends on property type, market, asset quality, lease structure, vacancy, rent growth, expense profile, and the investor's strategy. Higher cap rates may indicate stronger income yield but can also reflect higher risk. Lower cap rates may reflect premium asset quality or strong appreciation markets. Use local comparable sales as the primary reference.

Does cap rate include mortgage payments?

No. Cap rate is an unlevered metric. It compares NOI to property value before any financing. Mortgage payments are not included in NOI. For levered analysis, use cash-on-cash return or DSCR.

What expenses are included in NOI for cap rate?

NOI includes recurring operating expenses such as property taxes, insurance, management, routine maintenance, landlord-paid utilities, HOA fees, and other operating costs. NOI excludes mortgage payments, income taxes, depreciation, financing costs, and usually major capital expenditures.

How do I use cap rate to value a property?

The income approach estimates value as NOI divided by cap rate. For example, $60,000 NOI at a 6% cap rate implies approximately $1,000,000 value. This approach is commonly used for income-producing properties but should be verified with comparable sales, asset condition, market trends, and professional appraisal.

What is the difference between cap rate and cash-on-cash return?

Cap rate compares NOI to property value before financing. Cash-on-cash return compares annual pre-tax cash flow after debt service to the cash invested by the buyer. Cap rate is unlevered; cash-on-cash is levered. They answer different questions and should not be used interchangeably.

Why do coastal markets have lower cap rates?

Coastal and gateway markets often have higher property prices relative to income, which compresses cap rates. Investors may accept lower current yield in exchange for expected appreciation, tenant quality, supply constraints, or market liquidity. Lower cap rates do not automatically mean a better or worse investment.

Can cap rate be negative?

A negative cap rate means NOI is negative — operating expenses exceed income before debt service. This is rare for stabilized properties but can occur with high vacancy, deferred maintenance, or unusually high operating costs. Negative NOI properties are usually valued using methods other than direct capitalization.

Is cap rate the same as ROI?

No. Cap rate measures unlevered annual income yield. ROI (return on investment) usually includes financing, appreciation, principal paydown, and exit value over the full hold period. Cap rate is a point-in-time income metric; ROI is a total return metric.

Tennessee Cap Rate Calculator (2026)

What do you want to calculate?

Enter income, expenses, and property value to calculate the capitalization rate. Best for evaluating and comparing properties.

Income

How do you want to enter income?

Monthly Rent (per unit)

Number of Units

Vacancy Rate (typical: 5–10%)

Annual Operating Expenses

All fields are annual figures. Simple total field is not applied.

Property Taxes (annual)

Insurance (annual)

Property Management (annual)

Often 6–10% of gross rents for residential

Maintenance & Repairs (annual)

Utilities — if landlord paid

HOA Fees (annual)

Other Expenses (annual)

Total Expenses$0

Property Value

Calculate cap rate using:

Return on acquisition cost. Use when evaluating a deal before buying.

Purchase Price used for cap rate

Acquisition cost only — no financing

Current Market Value

Today's estimated value — use for refi or comparison

Asset Class (optional — improves benchmarks)

Cap Rate

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Cap rate estimates a property's unlevered income yield by comparing annual Net Operating Income with property value. It is commonly used to compare income-producing properties before financing, taxes, appreciation, and investor-specific assumptions are added.

This calculator supports cap rate, implied property value, and required NOI workflows. Results are intended for screening and underwriting support, not as a standalone investment decision or formal valuation.

Tennessee Cap Rate Calculator: What Investors Need to Know

This calculator estimates cap rate — the ratio of Net Operating Income to property value — for Tennessee investment properties. Tennessee has no state income tax, which significantly improves after-tax returns. Property taxes are among the lowest in the US at ~0.56% effective, and insurance averages $2,200/yr due to tornado, wind, and flood risk. These expenses directly reduce NOI and compress cap rates.

The calculator pre-fills Tennessee defaults: 8% vacancy, $2,200 insurance, and auto-calculates property tax at 2% of purchase price when you enter a value. Three modes are available: estimate cap rate from NOI, find implied value at a target cap rate, or determine the NOI needed to justify an asking price.

Cap rate measures unlevered yield only. It does not include mortgage payments, appreciation, or tax benefits. For full deal analysis, pair cap rate with DSCR, cash-on-cash return, and the Tennessee Rental Property Calculator.

Tennessee-Specific Factors That Affect Cap Rate

Property Tax (~2% for Investment Property)

Tennessee has no state income tax on rental income or capital gains — a major advantage for investors. Property taxes are low: the effective rate per Tax Foundation is 0.56% statewide. On a $280K property, that is roughly $1,568/yr — well below the national average.

Insurance ($2,200/yr Average)

Tennessee insurance costs are above the national average at approximately $2,200/yr. Tornado and hail risk in central Tennessee can increase premiums. The Tennessee Department of Insurance oversees rate regulation. Properties in FEMA flood zones along the Cumberland, Tennessee, or Mississippi rivers may need separate flood insurance, adding $400-$1,200/yr.

Vacancy (8% Statewide Average)

FRED data shows Tennessee rental vacancy at 6.5% statewide (2025). Nashville runs 5-6%, Memphis 8-10% in some neighborhoods, Chattanooga 6%, Knoxville 5-7%. For SFR underwriting, 7% is a conservative baseline. Rural areas can reach 8-10%.

No State Income Tax

Tennessee has no state income tax on wages, salaries, or rental income. The Hall Tax on investment income was fully repealed in 2021. This is a major advantage — your rental income and capital gains are taxed only at the federal level, just like Texas and Florida.

Transfer Tax ($0.37/$100)

Tennessee charges a state transfer tax of $0.37 per $100. On a $280K property, that is about $1,036. This adds to acquisition costs compared to no-tax states like Texas or Indiana, but is lower than Florida ($0.70/$100) or New York (0.4%-2.9%). Transfer tax does not change cap rate, but it increases your total cash invested.

Tennessee Cap Rate Benchmarks by Metro (2026)

These ranges reflect SFR and small multifamily (2-4 units) based on Zillow, Redfin, and Tennessee REALTORS data. Actual cap rates depend on property condition, location within the metro, and expense assumptions.

Metro	Median Price	Median Rent	Cap Rate Range	Insurance Avg
Memphis	$155K	$1,200/mo	6.5-8.0%	$2,400
Nashville	$380K	$2,100/mo	4.0-5.5%	$2,200
Chattanooga	$250K	$1,500/mo	5.0-6.5%	$2,100
Knoxville	$270K	$1,600/mo	5.0-6.5%	$2,000

Sources: Zillow ZHVI/ZORI, Redfin median sale data, Tennessee REALTORS Market Statistics (Q2 2026). Cap rates modeled with 8% vacancy, 9% PM, 1% maintenance.

Worked Example: Memphis Fourplex ($240K)

A 4-unit property in Memphis's Cooper-Young neighborhood, listed at $240,000. Each unit rents for $850/mo. Here is the full NOI breakdown using Tennessee defaults.

Gross Rental Income	$40,800/yr	$850 × 4 × 12
Vacancy (8%)	-$3,264	TN avg
Effective Gross Income	$37,536
Property Tax (0.56%)	-$2,040	$240K × 0.56%
Insurance	-$2,400	4-unit higher than SFR
Property Management (9%)	-$3,378	9% of EGI
Maintenance (1%)	-$2,400	$240K × 1%
Total Expenses	-$10,218
NOI	$27,318
Cap Rate	11.38%	$27,318 / $240,000

A strong cap rate in Memphis falls in the upper half of the metro range. The fourplex format helps because rent scales faster than expenses — insurance and tax are per-property, not per-unit. For comparison, a single $270K SFR in Knoxville renting at $1,600/mo would cap at roughly 5.2%.

Worked Example: Memphis SFR ($155K)

A 3BR/2BA single-family in Memphis's Midtown area, listed at $155,000 with market rent of $1,200/mo.

Gross Rental Income	$21,600/yr	$2,200 × 12
Vacancy (8%)	-$1,728
EGI	$19,872
Property Tax (0.56%)	-$5,700
Insurance	-$2,200	TN statewide average
PM (9%) + Maint (1%)	-$4,639
Cap Rate	6.53%	NOI $7,733 / $185K

Memphis offers the best rent-to-price ratio among major Tennessee metros. At $1,200 rent on $155K (0.77% monthly ratio), it clears the floor for positive cash flow with conventional financing. Compare this with Nashville where $380K buys a property renting for $2,100 — yielding a cap rate around 4-5%, an appreciation play rather than a cash flow play.

Tennessee Cap Rate FAQ

What is a good cap rate in Tennessee for 2026?

It depends on the metro. Memphis typically runs 6.5-8% with the best rent-to-price ratio. Nashville 4-5.5% (appreciation market). Chattanooga 5-6.5%. Knoxville 5-6.5%. Clarksville 5.5-7% due to military demand. A "good" cap rate is one where NOI covers expenses and debt service at your specific financing terms. Use the calculator above to model your deal.

How does Tennessee property tax affect cap rate?

Significantly. At 2% effective rate on investment property, tax on a $400K property is $8,000/yr. That is $2,000-$4,000 more than most states. This directly reduces NOI and compresses cap rate by 0.5-1.0 percentage points compared to lower-tax states like Florida (1.1%).

Why are Nashville cap rates lower than Memphis?

Nashville property prices are 2-3x higher than Memphis, but rents are only 75% higher. The rent-to-price ratio is much worse, so NOI relative to value is lower. Investors accept lower Nashville cap rates because they expect stronger appreciation driven by healthcare, tech, music industry, and tourism growth.

Does Tennessee no-income-tax benefit show up in cap rate?

No. Cap rate is a pre-tax metric calculated from NOI and property value. The no-income-tax advantage shows up in your after-tax cash flow and total return — not in cap rate itself. It is still a real benefit for hold-period analysis.

Should I budget for flood insurance in Tennessee cap rate analysis?

If the property is in a FEMA flood zone (common along the Cumberland, Tennessee, and Mississippi rivers), yes. Flood insurance adds $400-$1,200/yr to expenses. This is separate from the base hazard policy. Check the FEMA flood map before underwriting. Many Nashville and Chattanooga properties are in Zone X (minimal risk).

What vacancy rate should I use for Tennessee cap rate?

FRED shows 6.5% statewide. For SFR in stable neighborhoods, 5-7% is realistic. For value-add or transitional areas (common in Memphis), use 8-10%. College areas near UT Knoxville have seasonal vacancy patterns — budget 6-8% for student housing.

How do I compare cap rates between Tennessee metros?

Use consistent assumptions. Run each deal through the calculator with the same vacancy, PM, and maintenance rates. The key variable is rent-to-price ratio and local tax/insurance. Memphis and Clarksville generally win on cap rate, Nashville on appreciation. Chattanooga and Knoxville offer a balanced profile.

Sources

Tax Foundation — Tennessee effective property tax rates (taxfoundation.org)
Tennessee Department of Insurance — Insurance premium data (insurance.tennessee.gov)
Federal Reserve FRED — Tennessee rental vacancy rate (fred.stlouisfed.org)
Zillow Research — ZHVI and ZORI median values by metro
Tennessee REALTORS — Market Statistics Q2 2026

Tennessee Cap Rate Calculator