How to Calculate Capitalisation Rate on a Rental Property

Compare property operations separately from the way a purchase is financed.

Use the Cap Rate Calculator alongside this illustrative example.

A practical example

An illustrative property valued at 200,000 receives 18,000 annual rent and has 6,000 annual operating expenses. Net operating income is 12,000, giving a 6% cap rate. A mortgage payment changes the investor’s cash flow, but does not belong in this unlevered operating comparison.

Check the result

Reconcile the expense total with management, insurance, maintenance and vacancy assumptions. Reducing expenses simply to obtain a better percentage makes the comparison less useful.

Try a comparison

Keep the property value at 200,000 and increase operating expenses by 2,000. NOI falls from 12,000 to 10,000 and cap rate from 6% to 5%. The example shows why comparable expense assumptions matter as much as advertised rent.

What this does not establish

The percentage is not a forecast of sale value or a complete return. Compare properties using the same expense definitions and obtain local professional advice before investing.

Report unclear guidance or a result that needs checking.