How to calculate a rental property’s cap rate

Cap rate compares a property's annual net operating income with its purchase price. It excludes mortgage payments, so financing does not change the comparison.

The formula

Cap rate = annual NOI ÷ purchase price × 100.

For an existing property, an analysis may use current property value instead. The Rental Wire analyzer uses the purchase price you enter. Closing costs and renovation spending count toward upfront cash, but are not added to the cap-rate denominator.

A worked example

A $150,000 property rents for $2,000 per month. After vacancy, management, routine maintenance, insurance and property taxes, it produces $1,250 of monthly NOI, or $15,000 per year.

Cap rate = $15,000 ÷ $150,000 × 100 = 10.00%.

Capital reserves and mortgage payments reduce spendable cash flow. They do not reduce the NOI used in this calculation. See the NOI example for the expense breakdown.

What the percentage tells you

A higher cap rate means more operating income for the same purchase price. Before comparing properties, check that rents are achievable and expenses reflect each property’s condition.

For the return on the money you actually contribute, calculate cash-on-cash return. A return calculated on price plus closing costs and renovations uses a different cost basis.

Try these figures in the property analyzer

Example figures are rounded; calculations use full precision.