How this number is made
Cap rate asks what the building earns before debt, as a percent of the price. A mortgage payment does not belong in the expenses. The rental-yield page is the version that starts from rent instead of NOI.
- NOI is rent after vacancy, tax, insurance, and operating costs. Not the mortgage.
- Price is what you would pay, including any capital spend you treat as part of the basis if you want it in.
Formula
Cap rate = net operating income ÷ price.
Worked example
With the figures already in the form, cap rate is 6.67%.
Questions
Is a higher cap rate better?
It is a higher yield and often a higher risk, a worse building, or a market where buyers demand more. Compare caps inside one market, not across a cheap city and an expensive one.
Where does the loan go?
Into cash-on-cash and debt-service coverage, not into the cap rate. Cap rate is so two buildings can be compared before financing.