How to calculate cap rate
Cap rate = annual NOI ÷ property value × 100
Net operating income (NOI) is income after vacancy minus ordinary operating expenses. Financing is left out so that two properties can be compared before considering their loans.
For example, $24,000 in annual NOI on a $300,000 property gives an 8% cap rate. This says nothing about loan payments or your initial cash investment.
What should operating expenses include?
Include property tax, insurance, maintenance, management, HOA and other recurring costs. Exclude mortgage payments, depreciation, income taxes and capital improvements. In our full rental model, capital reserves reduce cash flow separately from NOI.
Is a higher cap rate always better?
No. Differences in location, property condition, vacancy, expense assumptions and expected growth can explain a higher rate. Compare the same income period and accounting conventions.