Property Management

Property management is the work of running a rental for its owner: leasing, rent collection, maintenance, tenant communication and bookkeeping. Managers are usually paid a percentage of collected rent, and a proper cap rate includes that fee even when the owner does the work.

The calculator uses 8% of effective gross income, or $3,648 a year on the example property. Dropping that line would lift NOI to about $32,500 and the cap rate to about 6.5%. The higher figure describes the owner's own time being paid nothing, not a better property.

Appraisers and institutional buyers always charge a management fee because the next owner may not self-manage. Including it keeps your cap rate comparable to the ones published for sales in the area, which are built the same way.