Formula
Operating costs come out of rent. Debt does not:
cap rate = (annual rent − operating costs) / value
A property-tax-only page is not published. Tax you already pay can be typed into operating costs. A negative result means costs exceed rent.
Assumptions
- Operating costs are the annual cost of running the property, not the loan payment.
- Rent is the annual total, already adjusted for vacancy if you want that.
- The value is the price you are testing, which may be the purchase price or a later estimate.
Worked example
A value of $400,000.00, annual rent of $36,000.00, and operating costs of $8,000.00 produce a cap rate of 7.00%.
Input definitions
- Annual rent
- Rent expected for the year.
- Operating costs
- Costs of operating the building. Leave the mortgage out.
Limitations
Cap rate is not cash in your pocket if you borrowed to buy. It also does not forecast appreciation.
Questions
Should property tax go in operating costs?
Yes, if you want it in the cap rate. Type the annual tax with the other operating costs.
What if costs are higher than rent?
The cap rate is negative. The page still shows it.