Understanding Cap Rate

Capitalization Rate (Cap Rate) is a key real estate metric used to estimate the return on an investment property. It is calculated by dividing the property's net operating income (NOI) by its purchase price. The gross income from the property is the money earned from rent. The net operating income is the gross income minus expenses like property tax, insurance, property management fee, money set aside for maintenance, etc. A higher cap rate generally indicates higher returns but may also imply higher risk.

• Gross Income = Monthly Rent × 12
• Expenses = Property Tax + Home Insurance + Maintenance + Vacancy Loss + Property Management
• Net Operating Income (NOI) = Gross Income − Expenses
• Cap Rate = NOI ÷ Price