How to calculate cap rate from the real expense lines

Cap rate is a property's net operating income for a year divided by its price. The division takes a second. The work is in the income: which costs count, and whether vacancy is in it at all. Two people can quote different cap rates for the same building because they built that income differently.

This page builds it line by line from the actual costs. For a quicker version that assumes half the rent goes to expenses, the cap rate calculator does it with three numbers.

Nothing here is sent anywhere and nothing is stored. The figures loaded are Maple Street Duplex, the worked example inside the Rental Property Analyzer, so you can check every line of the walk-through below against the calculator. Other fixed costs is anything you pay whether the units are full or not, such as water and trash or an accountant.

Maple Street Duplex: two units at $1,600 a month, bought for $285,000.

The mortgage payment. Principal and interest are what your particular loan costs, and cap rate exists to describe the building, not the loan. Leaving financing out is what lets you compare two properties that would be bought in different ways.

Income tax and depreciation stay out for the same reason: they belong to the owner, not to the property.

The CapEx reserve is the line people disagree on. Leave it out and the cap rate looks better. The Rental Property Analyzer counts it as an operating cost, which is the conservative choice, because a roof gets replaced whether or not the spreadsheet planned for it.

Cap rate on the purchase price says what the deal earns on what you paid. Cap rate on market value says what it earns on what it is worth now. On the day you buy they match, and they drift apart from then on, which is why a seller can quote either one.

The calculator above shows both. In the Rental Property Analyzer the market figure can also come from an after-repair value: leave current market value blank and the file uses your ARV.

Run the same price and rent through the 50% shortcut and you get 6.74%, because it assumes $19,200 of yearly costs including vacancy, where the real lines for this duplex come to $17,851.60. On this property the shortcut is the more cautious figure. On an older building with a management company it can easily be the other way round, which is why the shortcut is a filter and the line-by-line version is what you check before an offer.

The Rental Property Analyzer runs exactly this calculation for one property with up to eight units, then shows it three ways side by side, projects it thirty years and lays out the full amortization schedule. It works in Excel and Google Sheets, and every formula in it is checked cell by cell before the file ships.