Let's say it is equal to $30,000 per year.ĭetermine the vacancy rate. It is simply the amount of money you get from your tenants each year. Let's say it is equal to $200,000.įind out your gross rental income. To do it, follow these simple steps:īegin with determining the property value – it can be, for example, its selling price. You can use the formulas mentioned above manually or calculate the cap rate with our cap rate calculator. Net income = (100 - operating expenses) * (100 - vacancy rate) * gross income

You can then use the following formula for the net income: It is important to note that operating expenses do not include mortgage payments, depreciation, or income taxes therefore, the net income is the cash you earn before debt service and before income tax. In that case, you can also include additional parameters: the vacancy rate (that is, during what percentage of the time does the property stay unoccupied) and the percentage of operating expenses (such costs as insurance, utilities, and maintenance). Suppose you are a more advanced real estate investor. (For more information on ratios, check our ratio calculator). In other words, this ratio is a straightforward way to measure the relationship between the return generated by the property and its price. Basically, the cap rate is the ratio of net operating income (NOI) to property value or sales price.Ĭap rate = net operating income / property value

The description above makes it easy to figure out the cap rate formula by yourself.

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