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How to calculate a rental property’s cap rate

Cap rate compares a property's annual net operating income with its purchase price. Because NOI excludes mortgage payments, cap rate lets you compare the property's operating income independently of its financing.

The formula

Cap rate = annual NOI ÷ purchase price × 100.

For an existing property, an analysis may use current property value instead. The Rental Wire calculator 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 under the assumptions entered. It does not establish that a property is a better investment. Check whether the rent is achievable, the expenses are complete and the condition warrants the repair estimate.

For the return on the money you actually contribute, calculate cash-on-cash return. Avoid mixing cap rate with a yield calculated on purchase price plus closing costs and renovations; those use different denominators.

Open the free calculator and try these figures

Illustrative example. Dollar figures are rounded for display; calculations use unrounded amounts.