It is calculated as follows:
Cap Rate = ( Property Value or Purchase Price / Net Operating Income (NOI) ) x 100
Steps to Calculate Cap Rate:
- Determine Net Operating Income (NOI)
NOI = Total Rental Income − Operating Expenses
- Excludes mortgage payments, depreciation, and capital expenditures.
- Includes property taxes, insurance, maintenance, and management fees.
- Determine the Property Value or Purchase Price
- Use the actual purchase price if recently acquired.
- If evaluating an existing property, use the current market value (via appraisal or comparable sales).
- Plug the Numbers into the Formula
- Multiply by 100 to express the cap rate as a percentage.
- Annual Rental Income: $50,000
- Operating Expenses: $20,000
- Net Operating Income (NOI) = $50,000 - $20,000 = $30,000
- Property Purchase Price: $500,000
- Cap Rate = ($30,000 / $500,000) × 100 = 6%