Cap Rate = Net Operating Income / Purchase Price

Note: this calculator derives the Net Operating Income for you by taking the Gross Annual Income and subtracting for Vacancies Allowance & Operating Expenses (NOI = gross annual income – operating expenses).

• Purchase price \$: Projected purchase price for the property plus additional acquisition costs such as renovation costs.
• Gross annual income \$: Total annual rental income plus any other income generated by the property per month. Other income might include money generated from laundry and other vending machines or renting some storage space.
• Vacancies allowance %: Estimated percentage of the year that the property may be vacant. The below defaults use a value of 4% (2 weeks/unit).
• Annual Operating expenses % (total annual expenses ÷ gross annual income): Annual expenses such as property taxes, insurance and maintenance.

The below defaults use a value of 28%. Example: 6000 (taxes) + 2500 (insurance) + 3260 (maintenance) = 11,760. 11,760 ÷ 42,000 = 28%. If you pay someone to manage the property, add that cost as an expense.

Some formulas also factor in reserves for replacements (money set aside to replace short-lived items like appliances). Keep in mind, when comparing properties against one another, remember to include the same variables for each property.

Find the Cap Rate
You know the purchase price and the annual rents and want to find the Cap Rate.

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Find the Value of a property
You know the prevailing Cap Rates in your area as well as the annual rents and want to find the value of a property.
Example: you are considering a duplex that brings in \$1750 per month each side (\$1750 * 2 * 12 = \$42,000) and you want to achieve the prevailing cap rate of 7.5%. Assuming a vacancies allowance of 4% and annual operating expenses of 28%, you will see the value of this property is \$380,800.

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