The cap rate formula is simple and widely used in real estate analysis.

Cap Rate Formula

Cap Rate = Net Operating Income (NOI) ÷ Property Value

This formula tells you the annual return percentage based on the property’s income performance.

Step 1: Calculate Net Operating Income (NOI)

Net Operating Income represents the property’s annual income after subtracting operating expenses.

NOI = Gross Income – Operating Expenses

Gross Income Includes:

• Rental income
• Parking fees
• Laundry income
• Storage fees
• Other property-related income

Operating Expenses Include:

• Property management fees
• Repairs and maintenance
• Insurance
• Property taxes
• Utilities (if owner-paid)
• Administrative costs

Operating expenses do not include:

• Mortgage payments
• Loan interest
• Depreciation
• Capital expenditures

Step 2: Divide NOI by Property Value

Once you calculate NOI, divide it by the current market value or purchase price of the property.

The result is expressed as a percentage.

Cap Rate Example

(Place this directly below the formula on the same page)

Example Scenario

• Annual Rental Income: $800,000
• Operating Expenses: $200,000
• Property Value: $10,000,000

Step 1: Calculate NOI

$800,000 – $200,000 = $600,000

Step 2: Calculate Cap Rate

$600,000 ÷ $10,000,000 = 0.06

Cap Rate = 6%

This means the property generates a 6% annual return based on its current value.