RightFiguresRent after vacancy, then expenses
Annual gross rental income is 12 × monthly gross rent. Effective rental income reduces that gross by the vacancy percent you enter:
effective = annual gross × (1 − vacancy ÷ 100)
Effective income rounds half up to the nearest cent. Net operating income is that effective income minus the annual operating expenses you enter. The capitalization rate is:
cap rate = NOI ÷ property value × 100
The percent rounds half up to six decimal places. A property value of $0.00 is rejected because the rate would be undefined. If expenses are larger than effective rent, NOI and the cap rate are negative. That is a valid result, not an error.
What belongs in the expenses
Include the property taxes, insurance, maintenance and management you want counted as operating costs. Do not include the loan payment, depreciation or income taxes. Those are financing, accounting and tax items. This rate is an unlevered property yield. It is not cash-on-cash return, which would subtract debt service and compare the remainder with the cash you invested.
The California Board of Equalization’s Lesson 8 describes direct capitalization as income divided by a rate, and an overall rate as net operating income divided by value, after vacancy and operating expenses. Some property-tax appraisals instead capitalize income before property taxes and put the tax rate into the cap rate. This page does not. If taxes should reduce NOI, include them in the operating expenses you type.
IRS Publication 527 separates residential rental income from expense categories such as insurance, repairs, mortgage interest and depreciation. Interest and depreciation can matter on a tax return. They are not subtracted in this NOI.
A 5.6% example
A $300,000 property, $2,000 of monthly rent, 5% vacancy and $6,000 of annual expenses:
- Annual gross rent is
12 × $2,000= $24,000.00. - Effective rent is 95% of that, $22,800.00.
- NOI is
$22,800 − $6,000= $16,800.00. - The cap rate is
$16,800 ÷ $300,000= 5.6%.
A vacancy of 33.333333% on $10.01 of monthly rent is not an even cent. Annual gross is $120.12, and effective income rounds half up to $80.08.
What this does not answer
It does not estimate a sale price from a market cap rate, choose a vacancy for you, or look up taxes and insurance. The loan payment is a separate question; the mortgage payment calculator estimates principal and interest for a home loan. Subtracting that payment here would turn the result into a levered cash-flow measure, which this page does not report.
Frequently asked questions
Should I subtract the mortgage payment?
Not in this NOI. Debt service is financing. Cash left after the loan payment,
divided by your cash invested, is a different ratio.
Can the cap rate be negative?
Yes, when the operating expenses you enter are greater than the rent left
after vacancy. A zero property value is rejected instead of dividing by zero.
Are the rent and expenses sent to analytics?
No. Analytics may record that this calculator ran. The property and rent
figures stay in the browser.
Sources & review
- Lesson 8, Capitalization — California State Board of Equalization
- Publication 527, Residential Rental Property — Internal Revenue Service
Last reviewed: . The formula is reproduced above so you can check the math independently.
Educational estimate only. A market cap rate, an appraisal and a tax return answer different questions.