Cap Rate on a $2,000,000 Rental Property

A $2,000,000 rental at $17,000 a month in rent produces about $124,916 of net operating income and a 6.2% cap rate under standard expenses. It needs $18,615 in rent to reach a 7% cap rate at this price.

The NOI on a $2,000,000 property

Assumptions: 5% vacancy, taxes at 1.2% of price ($24,000 a year), insurance at 0.5% ($10,000), 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: $17,000 a month (0.85% of price), $204,000 a year
Collected after vacancy: $193,800
Operating expenses: $68,884 (36% of collected income)
Net operating income: $124,916, or $10,410 a month
Cap rate: 6.25%. Gross rent multiplier: 9.8

Cap rate at different rents on a $2,000,000 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
$10,000	0.5%	$59,480	2.97%	16.7
$12,000	0.6%	$78,176	3.91%	13.9
$14,000	0.7%	$96,872	4.84%	11.9
$16,000	0.8%	$115,568	5.78%	10.4
$18,000	0.9%	$134,264	6.71%	9.3
$20,000	1.0%	$152,960	7.65%	8.3
$22,000	1.1%	$171,656	8.58%	7.6
$24,000	1.2%	$190,352	9.52%	6.9

How property taxes change the cap rate

At $17,000 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%	$10,000	$138,916	6.95%
0.8%	$16,000	$132,916	6.65%
1.0%	$20,000	$128,916	6.45%
1.2%	$24,000	$124,916	6.25%
1.5%	$30,000	$118,916	5.95%
2.0%	$40,000	$108,916	5.45%
2.5%	$50,000	$98,916	4.95%

What this NOI is worth at market cap rates

$124,916 of NOI valued at each cap rate, and the gap to the $2,000,000 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 $2,000,000
4%	$3,122,900	$1,122,900
5%	$2,498,320	$498,320
6%	$2,081,933	$81,933
7%	$1,784,514	-$215,486
8%	$1,561,450	-$438,550
9%	$1,387,956	-$612,044
10%	$1,249,160	-$750,840

Run the $2,000,000 property yourself

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

Build the NOI from rent, vacancy and expenses

Cap rate

6.25%

Solid

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

$124,916 NOI / $2,000,000 price

Net operating income

Gross scheduled income: $204,000
Vacancy: -$10,200
Effective gross income: $193,800
Taxes and insurance: -$34,000
Maintenance, reserves, management: -$34,884
Net operating income: $124,916
Monthly NOI: $10,410
Expense ratiooperating expenses / collected income: 36%

At a 7.00% cap rate

Value of this NOI: $1,784,514
Priced above that by: $215,486
NOI needed at this price: $140,000
Rent needed at this pricevs $17,000 now: $18,614

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

$2,000,000 rental cap rate questions

What is a good cap rate for a $2,000,000 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 $2,000,000 property in a 5% cap rate metro is fairly priced at 5%, and one in an 8% market is fairly priced at 8%. At $17,000 rent this one produces 6.2%.

How much rent does a $2,000,000 property need for a 7% cap rate?

About $18,615 a month, or 0.93% of price, under standard expense assumptions. For 6% it is $16,475 and for 8% it is $20,755. Lower property taxes bring each figure down.

What is the NOI on a $2,000,000 rental?

At $17,000 rent with 5% vacancy, taxes of $24,000, insurance of $10,000 and 18% of collected rent for maintenance, reserves and management, net operating income is $124,916 a year, an expense ratio of 36%. Your actual taxes and insurance will move it.