Cap Rate on a $400,000 Rental Property

A $400,000 rental at $3,400 a month in rent produces about $24,983 of net operating income and a 6.2% cap rate under standard expenses. It needs $3,725 in rent to reach a 7% cap rate at this price.

The NOI on a $400,000 property

Assumptions: 5% vacancy, taxes at 1.2% of price ($4,800 a year), insurance at 0.5% ($2,000), 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: $3,400 a month (0.85% of price), $40,800 a year
Collected after vacancy: $38,760
Operating expenses: $13,777 (36% of collected income)
Net operating income: $24,983, or $2,082 a month
Cap rate: 6.25%. Gross rent multiplier: 9.8

Cap rate at different rents on a $400,000 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
$2,000	0.5%	$11,896	2.97%	16.7
$2,400	0.6%	$15,635	3.91%	13.9
$2,800	0.7%	$19,374	4.84%	11.9
$3,200	0.8%	$23,114	5.78%	10.4
$3,600	0.9%	$26,853	6.71%	9.3
$4,000	1.0%	$30,592	7.65%	8.3
$4,400	1.1%	$34,331	8.58%	7.6
$4,800	1.2%	$38,070	9.52%	6.9

How property taxes change the cap rate

At $3,400 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%	$2,000	$27,783	6.95%
0.8%	$3,200	$26,583	6.65%
1.0%	$4,000	$25,783	6.45%
1.2%	$4,800	$24,983	6.25%
1.5%	$6,000	$23,783	5.95%
2.0%	$8,000	$21,783	5.45%
2.5%	$10,000	$19,783	4.95%

What this NOI is worth at market cap rates

$24,983 of NOI valued at each cap rate, and the gap to the $400,000 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 $400,000
4%	$624,580	$224,580
5%	$499,664	$99,664
6%	$416,387	$16,387
7%	$356,903	-$43,097
8%	$312,290	-$87,710
9%	$277,591	-$122,409
10%	$249,832	-$150,168

Run the $400,000 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.

$24,983 NOI / $400,000 price

Net operating income

Gross scheduled income: $40,800
Vacancy: -$2,040
Effective gross income: $38,760
Taxes and insurance: -$6,800
Maintenance, reserves, management: -$6,977
Net operating income: $24,983
Monthly NOI: $2,082
Expense ratiooperating expenses / collected income: 36%

At a 7.00% cap rate

Value of this NOI: $356,903
Priced above that by: $43,097
NOI needed at this price: $28,000
Rent needed at this pricevs $3,400 now: $3,723

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

$400,000 rental cap rate questions

What is a good cap rate for a $400,000 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 $400,000 property in a 5% cap rate metro is fairly priced at 5%, and one in an 8% market is fairly priced at 8%. At $3,400 rent this one produces 6.2%.

How much rent does a $400,000 property need for a 7% cap rate?

About $3,725 a month, or 0.93% of price, under standard expense assumptions. For 6% it is $3,295 and for 8% it is $4,150. Lower property taxes bring each figure down.

What is the NOI on a $400,000 rental?

At $3,400 rent with 5% vacancy, taxes of $4,800, insurance of $2,000 and 18% of collected rent for maintenance, reserves and management, net operating income is $24,983 a year, an expense ratio of 36%. Your actual taxes and insurance will move it.