**HOW TO CALCULATE A CAP RATE FOR RENTAL PROPERTIES**

**Real Estate Rental Property Investors rely upon a variety of types of information when negotiating for income producing properties – for instance, the desirability of the rental property’s current location and/or any prospective changes in the neighborhood are two common factors. One crucial piece of information that helps investors make their decision is called the Capitalization Rate (or “CAP Rate”). The cap rate (expressed as the ratio of the property’s net income to its purchase price) allows investors to compare properties by evaluating a rate of return on the rental investment made in the property.****[1]****[2]**** If you are considering an investment property, then you may want to calculate the cap rate first and then use it to help you make your decision**

**Call a local Apartment Realtor to find out your local Market CAP rate for rental properties in your area.**

**!. Calculate the yearly gross income of the investment property. The gross income of a piece of investment property will mainly be in terms of rent rolls. In other words, when a real estate investor buys a home, s/he usually makes money from it primarily by renting it out to tenants.****[3]**** However, this isn’t the sole possible source of income – miscellaneous income can also accrue from the property in the form of coin operated vending or washing machines, parking, etc.**

**For example, let’s say that we’ve just purchased a house we intend to rent to tenants at a rate of $750/month. At this rate, we can expect to make 750 × 12 = $9,000 per year in gross income from the rental property.**

**2.Subtract the operating expenses associated with the rental property from the gross income. Any piece of real estate comes with operating costs. Usually, these are in the form of maintenance, insurance, taxes, utilities, vacancy costs, and property management.****[4]**** Use accurate estimates for these numbers and subtract them from the gross income you found above. This will find the property’s ***net income***. For example, let’s say that, after having our rental property appraised, we find that we can expect to pay $900 in property management, $450 in maintenance, $710 in taxes, and $650 in insurance per year for our rental property. 9,000 – 900 – 450 – 710 – 650 = $6,290, our property’s net income.**

**Note that the cap rate ***doesn’t*** account for the property’s business expenses – including the purchase costs of the property, mortgage payments, fees, etc. Since these items reflect the investor’s standing with the lender and are variable in nature, they adversely affect the neutral comparison that the cap rate is meant to deliver.**

**3.Divide the net income by the rental property purchase price. The cap rate is the ratio between the net income of the property and its original price or capital cost. Cap Rate is expressed as a percentage.****[5]**

**Let’s assume we purchased our rental property for $40,000. Given this information, we now have everything we need to know to find our cap rate. See below:**

**$9000 (gross income)**

- -$900 (property management)

- -$450 (maintenance)

- -$710 (taxes)

- -$650 (insurance)

- =$6290 (net income) / $40000 (purchase price) = 0.157 =
**15.7% cap rate**

- Source :Carla Toebe

**HOW TO CALCULATE A CAP RATE FOR RENTAL PROPERTIES**