Calculating Cap Rates

A simple formula is used to calculate multifamily cap rates. 

Cap Rate = NOI/Market Value (or Purchase Price)

For example, if a multifamily property generates $100,000 in annual revenue and has $40,000 in operating expenses, its net operating income would be $60,000. If the property’s current market value is $1,000,000, the cap rate would be calculated as follows: 

Cap Rate = 60,000/1,000,000=0.06 or 6%

This means that the property is expected to generate a 6% return on investment for its owner.