When evaluating a rental property, the first number every investor asks about is the cap rate. Yet despite its ubiquity, it is one of the most frequently misunderstood metrics in real estate.
What Is a Cap Rate? The capitalization rate — cap rate — is the property’s Net Operating Income (NOI) divided by its purchase price, expressed as a percentage.
NOI = Gross Annual Rent − Operating Expenses
Operating expenses include property management fees, property taxes, insurance, and maintenance reserves. Importantly, NOI excludes mortgage payments — cap rate is a financing-neutral metric.
A Real-World Calculation A property purchased for $130,000 generating $1,300/month in gross rent, with $450/month in operating expenses, has a monthly NOI of $850, or $10,200 annually.
Cap Rate = $10,200 ÷ $130,000 = 7.85%
Why Cap Rate Matters for Comparison Cap rate lets you compare properties across different markets and price points on an equal footing. In the Israeli market, cap rates on residential property rarely exceed 2.5–3%. In our US Sun Belt markets, we consistently target properties with cap rates of 7–9%.