What cap rate excludes
Cap rate is a property-level yield before financing. It does not include mortgage payments, income tax or owner-specific financing terms. That is why cash-on-cash return is a separate metric.
Example
If annual NOI is $36,000 and the property basis is $600,000, cap rate is 36,000 / 600,000 x 100 = 6%.
Common mistakes
Do not use gross rent as NOI. Subtract vacancy, operating expenses, property taxes, insurance and management costs according to your underwriting method.
Limitations
NOI quality matters. Vacancy, repairs, property management, insurance, taxes and capital expenditures can materially change the result.
Last reviewed: 2026-05-17