How To Calculate CAP Rate

Probably the most important number when it comes to real estate investing. CAP rate is the number that tells you whether you should invest in a property or not. Here is how you can calculate the CAP rate of any property: First let's imagine you purchase a property for $50k cash. And you rent it out for $500/mo. To find out how much you make in a year from the rent you multiply the $500 by 12 or $6,000, which is your annual gross income. You then take that amount and divide by the amount you invested so $6,000 / $50,000 = 0.1 and finally you multiply by 100 to get the percentage, in this case 10% is your gross CAP rate. But gross CAP is not what you're after because you also need to take into account the operating expenses for the property, things like maintenance fees, up front rehab costs, annual taxes, etc. So what most investors do instead of accounting for every single item that is an expense they instead subtract 30% from the gross CAP and call it a day. In our case $6,000 x 30% = $1,800 so we have $6,000 - $1,800 = $4,200 is your net annual income. So to get the net CAP rate you divide that number by how much you purchased the property for or $4,200 / $50,000 = 0.084 and to get the percentage you multiply by 100 so your net CAP rate is 8.4% This number is super handy when you're looking at hundreds of property to decide which one to purchase. This greatly simplifies the math needed to do the calculations. If you enjoyed this video please smash that like button. If you have any questions please leave them in the comments section below.