Cap Rate = NOI ÷ Property Value
NOI / Cap Rate = Max Price to Pay
Property Value × Cap Rate = Expected NOI
NOI = Gross Rent − Operating Expenses (taxes, insurance, maintenance) — before mortgage payments.
NOI = Gross Rent − Operating Expenses (taxes, insurance, maintenance) — before mortgage payments.
Property Income & Expenses
Monthly Gross Rent
$
Monthly Operating Expenses Taxes, insurance, maintenance — NOT mortgage
$
Monthly NOI
$
1,500
Annual NOI
$
18,000
Property Value
List Price / Purchase Price
$
Going Cap Rate in Neighborhood
%
Monthly Mortgage Payment Optional — for cash flow display
$
This Property's Cap Rate
$18,000 NOI ÷ $425,000 = 4.24%
4.24%
cap rate
Deal Assessment
Market cap rate in neighborhood
4.50%
This property's cap rate
4.24%
Maximum price at market cap rate
$
400,000
List price vs. max price
−$25,000
Cash Flow After Mortgage
Monthly NOI
$
1,500
Monthly Mortgage Payment
($
2,100
)Monthly Cash Flow After Mortgage
−$600
Income & Market Cap Rate
Monthly Gross Rent
$
Monthly Operating Expenses
$
Monthly NOI
$
1,225
Annual NOI
$
14,700
Market Data
Going Cap Rate in Neighborhood
%
List / Ask Price To compare against max
$
Maximum Price You Should Pay
$14,700 NOI ÷ 4.00% = $367,500
$367,500
at market cap rate
Offer Guidance
Max price at market cap
$
367,500
List / Ask price
$
395,000
Overpayment vs. market cap
−$27,500
At list price, actual cap rate would be
3.72%
Property & Market
Property Appraised Value / Price
$
Going Cap Rate in Neighborhood
%
Monthly Operating Expenses
$
Results
Annual NOI Needed
$
18,750
Monthly NOI Needed
$
1,563
Monthly Expenses
($
800
)Monthly Gross Rent Needed
$1,563 NOI + $800 expenses = $2,363/mo gross
$2,363
per month gross rent
Market Rent Check
Current / Asking Rent
$/mo
Rent vs. what you need
−$463/mo
Actual cap rate at current rent
2.64%
Leverage is positive when (Cap Rate + Appreciation Rate) > Mortgage Rate — meaning the property earns more than the debt costs.
Leverage is negative when it's the other way around — debt costs more than the property returns.
Leverage is negative when it's the other way around — debt costs more than the property returns.
Property & Financing Inputs
Property Cap Rate
%
Expected Annual Appreciation Rate
%/yr
Mortgage Interest Rate
%
Property Value
$
Down Payment
%
Leverage Assessment
Cap Rate
4.50%
Annual Appreciation Rate
3.00%
Cap Rate + Appreciation
7.50%
Mortgage Rate
7.50%
Leverage Spread
0.00%
⚖ Break-even leverage — returns equal the cost of debt.
Consider cash flow and other keys of profitable investment.
7 Keys of Profitable Real Estate Investment
1. Leverage — Is (cap rate + appreciation) > mortgage rate?
2. Rate of Return — Cash on Cash + IRR analysis (see IRR Calculator)
3. Liquidity — Real estate equity is NOT liquid. Maintain cash cushion. Larger mortgage = more liquidity.
4. Marketability — Brokerage fees, advertising, title, transfer taxes = "cost to carry" when you exit.
5. Management — Asset management (performance vs. opportunities) + property management (maintenance, tenants).
6. Tax Impact — Tax credits, depreciation deductions, 1031 exchanges, passive vs. active income classification.
7. Risk — Vacancy, lease expiration, tenant credit, increasing carry costs. Mitigate via rent-to-own, diversification, cash cushion.