How to Find NOI With a Cap Rate: Working the Formula Backwards

To find NOI with a cap rate, multiply the price by the rate. A $500,000 asking price at a 6% cap rate implies $30,000 of net operating income. That is the whole calculation. The useful part comes after, because $30,000 is a test, and the listing in front of you either meets it or does not.

Cap rate vs NOI: which one is the input

Net operating income is a dollar figure. It is a year of rent, minus vacancy, minus operating expenses, before any loan payment. Cap rate is a percentage: NOI divided by price. So NOI is the input and the cap rate is the result.

There are three forms of the same equation, and each answers a different question.

• Cap rate = NOI / price. What yield does this price buy?
• Value = NOI / cap rate. What is this income worth?
• NOI = price x cap rate. What income does this price demand?

People search for “cap rate divided by NOI.” That one is not a real calculation. A percentage divided by dollars gives you nothing you can act on. When you hold a price and a market rate and you want the income, you multiply. For the standard direction, how the cap rate is calculated covers it line by line.

Why you would solve for income instead of the rate

Most of the time a buyer has the income statement and wants the rate. Sometimes the order flips.

A broker sends an asking price and nothing else. You know roughly where similar rentals trade in that market. Required NOI tells you what the seller is implicitly claiming before a single page of financials arrives, and it gives you something to check those financials against when they do.

It also works on your own property. If you want to sell at a given price, the required NOI is the income you have to show by closing. That turns a price goal into a rent and expense plan.

Rearranging the formula: price times cap rate

On a $500,000 price, the required income at each rate looks like this:

• 5%: $25,000 a year
• 5.5%: $27,500
• 6%: $30,000
• 6.5%: $32,500
• 7%: $35,000
• 7.5%: $37,500
• 8%: $40,000

Each step of half a point adds $2,500 of required annual income. Divide by twelve for a monthly figure. A 6% cap rate on $500,000 means $2,500 a month left after every operating cost and before any mortgage. A buyer asking for a 7.5% cap rate on the same price is asking the house to clear $3,125 a month net.

Example: what a $500,000 ask at a 6 cap has to earn

Required NOI: $30,000.

Now build the actual number. The house rents for $4,000 a month, or $48,000 a year. Allow 5% for vacancy and collected income is $45,600. Property taxes run $6,000, insurance $2,500, and 18% of collected rent set aside for maintenance, reserves and management comes to $8,208. Those operating expenses total $16,708, about 37% of collected income. NOI is $28,892, and the cap rate is 5.78%.

So the property misses the 6% target by $1,108 a year. Put another way, $28,892 of income is worth about $481,500 at a 6% cap rate. The ask is roughly $18,500 above that.

Holding the required NOI against the rent roll you were sent

To compare a target to a rent roll, work from the bottom up. Start with required NOI of $30,000. Add back the fixed costs that do not move with rent, $6,000 of taxes and $2,500 of insurance, for $8,500. The variable 18% leaves 82 cents of every collected dollar, so collected income has to reach $38,500 divided by 0.82, about $46,951. Gross out the 5% vacancy and scheduled rent has to be about $49,422, or $4,118 a month.

That is the number to hold against the page you were sent. Watch for a rent roll quoting scheduled rent while the units sit vacant, or one that counts a rent nobody has paid in three months. Counting gross rent as if it were collected income is one of the common mistakes with cap rate, and it is the one that makes a thin deal look fine.

Turning the shortfall into rent

$1,108 of missing NOI is not $1,108 of missing rent. Every extra dollar of rent loses a nickel to vacancy and 18 cents of what is left to variable costs, so about 78 cents reaches NOI. Divide $1,108 by 0.78 and you need about $1,422 more a year in scheduled rent, or roughly $119 a month.

Rent has to go from $4,000 to about $4,119, a 3% increase. Then ask the real question: does that rent exist? Three percent is a normal renewal in most places, so this gap is a conversation about price or a small bump. Check it against the rents comparable units get, not against what you hope.

When the required income is impossible and you walk

Change one input and the same math ends the deal. If your target is a 7.5% cap rate on $500,000, required NOI is $37,500. Running the same build backwards, rent would have to reach about $4,921 a month. That is 23% above the current rent on a house that already rents for $4,000. No negotiation gets you there, and no light renovation does either.

At that point you have two honest options. Offer the price the income supports, which at 7.5% is about $385,000, or accept that the market prices this kind of property near 5.8% and your target belongs somewhere else. Be careful about closing the gap by trimming expenses on paper. Taxes often reset on sale, insurance has been moving, and dropping the management line only works if you plan to do the work yourself.

Run it on the calculator

The cap rate calculator on the home page builds NOI from rent, vacancy and each expense line, then shows the cap rate at your price and the price any target rate implies. Change the rent until the required income appears, and you have your answer in seconds instead of on paper.