Cap Rate

That the cap rate is net operating income (NOI) divided by the sales price or value of the property? NOI is annual income minus expenses, before income taxes and interest.

A five unit apartment building with monthly rents of $3,750 would have a maximum gross annual rent of $45,000. ($3,750 x 12 = $45,000). If the total annual expenses were $25,200, the NOI would be $19,800. ($45,000 – $25,200)

If the sales value of the property was $450,000 the cap rate would be 4.4%. (19,800/450,000)