Understanding how income and expenses work is the most important element to buying and owning rental properties. You will hear many things about how that is done. You may have heard of CAP Rate, rent multiplier, and others. I can ask many people what the definition of a rental property is, and I usually get many different answers.

The truest way to evaluate an income property is with the Capitalization Rate, a.k.a. CAP Rate. The formula is simple. The complicated part is getting all the correct numbers.

The example below uses the assumptions that the rent is $1,000 per month, the expenses are $2,000, and the acquisition or purchase price is $100,000. That is for simple math and a demonstration.

- Measures the performance of a property
- Cap Rates are always based on Cash.
- The Cap Rate Formula
- Income minus expenses, divided by the acquisition cost

$12,000 (annual income)

-$2,000 (expenses)

= $10,000

$10,000 / $100,000 = 10%

Here is a link to a Google Sheet that is a working tool for evaluating.