In real estate, cap rate is the net operating income divided by the purchase price. Cap rate, also referred to as capitalization rate, provides the rate of return that is expected to be generated on a real estate investment property. Below you will learn key steps to take and the cap rate formula.
Steps to evaluating cap rate
1. Attain your net operating income (NOI).
- Subtract your monthly expenses from your monthly income.
- Multiply the above number by 12.
- The result is your NOI.
2. Identify your purchase price.
- Divide your NOI by the purchase price.
- The result is your cap rate.
3. Compare your cap rate to other potential investments.
- Savings or long term investing accounts
- Stocks and bonds
- Other residential investment properties
Cap rate formula
Cap rate = net operating income / purchase price
Investment Property Worksheet
While cap rate is an important metric to evaluate when vetting investment properties, there are more factors to consider. Download our investment worksheet to quickly calculate these key investment property metrics:
- Total Cash Flow
- Gross Rent Multiplier
- CAP Rate
- Monthly Net Operating Income
- Annual Net Operating Income
- Yearly Appreciation Rate