Rental Yield and Cap Rate Calculator

Property: $250,000, Rent: $1,800/month, Expenses: $6,000/year, Vacancy: 5% Step 1: Annual rent = $21,600 Step 2: Effective income = $21,600 × 95% = $20,520 Step 3: NOI = $20,520 − $6,000 = $14,520 Step 4: Cap Rate = $14,520 / $250,000 = 5.81%

Rental yield and capitalization rate, often called cap rate, are fundamental metrics for anyone evaluating real estate investments, especially rental properties. Gross rental yield provides a preliminary look at a property's income generation. It is calculated by dividing the total annual rent by the property's purchase price. This figure offers a high-level percentage return based solely on rent, before any expenses. While useful for an initial comparison, it does not account for the true cost of ownership. The capitalization rate offers a more detailed and accurate picture of a property's profitability. To calculate cap rate, you first need to determine the Net Operating Income (NOI). NOI is the total annual rental income minus all annual operating expenses, including property taxes, insurance, maintenance, and an allowance for vacancies. The cap rate is then found by dividing this NOI by the property's current market value or purchase price. It represents the unleveraged, before debt service, return on investment. Both metrics are crucial for assessing the financial viability and comparing different investment opportunities in the real estate market.