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

A $1,000,000 rental at $8,500 a month in rent produces about $62,458 of net operating income and a 6.2% cap rate under standard expenses. It needs $9,305 in rent to reach a 7% cap rate at this price.

The NOI on a $1,000,000 property

Assumptions: 5% vacancy, taxes at 1.2% of price ($12,000 a year), insurance at 0.5% ($5,000), 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: $8,500 a month (0.85% of price), $102,000 a year
Collected after vacancy: $96,900
Operating expenses: $34,442 (36% of collected income)
Net operating income: $62,458, or $5,205 a month
Cap rate: 6.25%. Gross rent multiplier: 9.8

Cap rate at different rents on a $1,000,000 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
$5,000	0.5%	$29,740	2.97%	16.7
$6,000	0.6%	$39,088	3.91%	13.9
$7,000	0.7%	$48,436	4.84%	11.9
$8,000	0.8%	$57,784	5.78%	10.4
$9,000	0.9%	$67,132	6.71%	9.3
$10,000	1.0%	$76,480	7.65%	8.3
$11,000	1.1%	$85,828	8.58%	7.6
$12,000	1.2%	$95,176	9.52%	6.9

How property taxes change the cap rate

At $8,500 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%	$5,000	$69,458	6.95%
0.8%	$8,000	$66,458	6.65%
1.0%	$10,000	$64,458	6.45%
1.2%	$12,000	$62,458	6.25%
1.5%	$15,000	$59,458	5.95%
2.0%	$20,000	$54,458	5.45%
2.5%	$25,000	$49,458	4.95%

What this NOI is worth at market cap rates

$62,458 of NOI valued at each cap rate, and the gap to the $1,000,000 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 $1,000,000
4%	$1,561,450	$561,450
5%	$1,249,160	$249,160
6%	$1,040,967	$40,967
7%	$892,257	-$107,743
8%	$780,725	-$219,275
9%	$693,978	-$306,022
10%	$624,580	-$375,420

Run the $1,000,000 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.

$62,458 NOI / $1,000,000 price

Net operating income

Gross scheduled income: $102,000
Vacancy: -$5,100
Effective gross income: $96,900
Taxes and insurance: -$17,000
Maintenance, reserves, management: -$17,442
Net operating income: $62,458
Monthly NOI: $5,205
Expense ratiooperating expenses / collected income: 36%

At a 7.00% cap rate

Value of this NOI: $892,257
Priced above that by: $107,743
NOI needed at this price: $70,000
Rent needed at this pricevs $8,500 now: $9,307

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

$1,000,000 rental cap rate questions

What is a good cap rate for a $1,000,000 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 $1,000,000 property in a 5% cap rate metro is fairly priced at 5%, and one in an 8% market is fairly priced at 8%. At $8,500 rent this one produces 6.2%.

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

About $9,305 a month, or 0.93% of price, under standard expense assumptions. For 6% it is $8,235 and for 8% it is $10,375. Lower property taxes bring each figure down.

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

At $8,500 rent with 5% vacancy, taxes of $12,000, insurance of $5,000 and 18% of collected rent for maintenance, reserves and management, net operating income is $62,458 a year, an expense ratio of 36%. Your actual taxes and insurance will move it.