Cap Rate on a $1,500,000 Rental Property

A $1,500,000 rental at $12,750 a month in rent produces about $93,687 of net operating income and a 6.2% cap rate under standard expenses. It needs $13,960 in rent to reach a 7% cap rate at this price.

The NOI on a $1,500,000 property

Assumptions: 5% vacancy, taxes at 1.2% of price ($18,000 a year), insurance at 0.5% ($7,500), and 5% maintenance, 5% capital reserves and 8% management on collected rent. Taxes vary the most by state, so replace them with the real bill.

Rent: $12,750 a month (0.85% of price), $153,000 a year
Collected after vacancy: $145,350
Operating expenses: $51,663 (36% of collected income)
Net operating income: $93,687, or $7,807 a month
Cap rate: 6.25%. Gross rent multiplier: 9.8

Cap rate at different rents on a $1,500,000 property

Rent as a percent of price is the fastest screen. Roughly, each 0.1% of price in monthly rent adds about 0.9 points of cap rate under these expense assumptions.

Monthly rent	Rent / price	NOI	Cap rate	GRM
$7,500	0.5%	$44,610	2.97%	16.7
$9,000	0.6%	$58,632	3.91%	13.9
$10,500	0.7%	$72,654	4.84%	11.9
$12,000	0.8%	$86,676	5.78%	10.4
$13,500	0.9%	$100,698	6.71%	9.3
$15,000	1.0%	$114,720	7.65%	8.3
$16,500	1.1%	$128,742	8.58%	7.6
$18,000	1.2%	$142,764	9.52%	6.9

How property taxes change the cap rate

At $12,750 rent. Effective tax rates run from under 0.5% in Hawaii to over 2% in New Jersey, Illinois and parts of Texas, and the cap rate follows.

Tax rate	Annual taxes	NOI	Cap rate
0.5%	$7,500	$104,187	6.95%
0.8%	$12,000	$99,687	6.65%
1.0%	$15,000	$96,687	6.45%
1.2%	$18,000	$93,687	6.25%
1.5%	$22,500	$89,187	5.95%
2.0%	$30,000	$81,687	5.45%
2.5%	$37,500	$74,187	4.95%

What this NOI is worth at market cap rates

$93,687 of NOI valued at each cap rate, and the gap to the $1,500,000 price. A buyer in a 5% market and a buyer in an 8% market are not looking at the same property.

Market cap rate	Implied value	vs $1,500,000
4%	$2,342,175	$842,175
5%	$1,873,740	$373,740
6%	$1,561,450	$61,450
7%	$1,338,386	-$161,614
8%	$1,171,088	-$328,913
9%	$1,040,967	-$459,033
10%	$936,870	-$563,130

Run the $1,500,000 property yourself

Preloaded with the numbers above. Change the rent, taxes, insurance or expenses to match the property.

Cap rate

6.25%

Solid

Solid. Mid-priced and secondary markets. Enough yield to cash flow with a normal loan.

$93,687 NOI / $1,500,000 price

Net operating income

Gross scheduled income: $153,000
Vacancy: -$7,650
Effective gross income: $145,350
Taxes and insurance: -$25,500
Maintenance, reserves, management: -$26,163
Net operating income: $93,687
Monthly NOI: $7,807
Expense ratiooperating expenses / collected income: 36%

At a 7.00% cap rate

Value of this NOI: $1,338,386
Priced above that by: $161,614
NOI needed at this price: $105,000
Rent needed at this pricevs $12,750 now: $13,960

Other screens

Gross rent multiplierprice / annual gross rent: 9.8
Rent to pricemonthly rent / price. The 1% rule.: 0.85%
Each $100/mo of rent is worthof value at the target cap rate: $13,354
Each $1,000/yr of expense costsof value at the target cap rate: $14,286

$1,500,000 rental cap rate questions

What is a good cap rate for a $1,500,000 property?

The same as for any property in its market: at or above what comparable rentals sell for. Price does not change the benchmark. A $1,500,000 property in a 5% cap rate metro is fairly priced at 5%, and one in an 8% market is fairly priced at 8%. At $12,750 rent this one produces 6.2%.

How much rent does a $1,500,000 property need for a 7% cap rate?

About $13,960 a month, or 0.93% of price, under standard expense assumptions. For 6% it is $12,355 and for 8% it is $15,565. Lower property taxes bring each figure down.

What is the NOI on a $1,500,000 rental?

At $12,750 rent with 5% vacancy, taxes of $18,000, insurance of $7,500 and 18% of collected rent for maintenance, reserves and management, net operating income is $93,687 a year, an expense ratio of 36%. Your actual taxes and insurance will move it.