Cap Rate (Capitalization Rate)
The ratio of a property’s Net Operating Income (NOI) to its current market value. It represents
the expected annual return if purchased with all cash (no financing).
Formula: Cap Rate = NOI ÷ Property Value × 100
Net Operating Income (NOI)
Annual income generated by a property after deducting operating expenses. Does NOT include
mortgage payments, capital expenditures, or depreciation.
Formula: NOI = Effective Gross Income - Operating Expenses
Property Valuation Using Cap Rate
You can estimate a property’s value by dividing its NOI by the market cap rate for similar
properties.
Formula: Property Value = NOI ÷ Cap Rate
Required NOI Calculation
To achieve a target cap rate at a given price, calculate the required NOI.
Formula: Required NOI = Property Value × Target Cap Rate
What’s a “Good” Cap Rate?
There’s no universal answer—it depends on property type, location, and risk tolerance.
3-5%: Low risk, prime locations, Class A properties
5-7%: Moderate risk, stable markets, typical residential
7-10%: Higher yield, value-add opportunities, secondary markets
10%+: High risk, distressed properties, tertiary markets
Cap Rate vs Cash-on-Cash Return
Cap rate assumes all-cash purchase and ignores financing. Cash-on-Cash measures actual return on
cash invested after financing.
CoC Formula: Cash-on-Cash = Annual Cash Flow ÷ Cash Invested
Payback Period
How many years of NOI it would take to recover the property’s purchase price. A rough measure of
investment timeline.
Formula: Payback = Property Value ÷ Annual NOI
Effective Gross Income (EGI)
Total potential rental income minus vacancy and credit losses. The realistic income you can
expect to collect.
Formula: EGI = Gross Income × (1 - Vacancy Rate)
