Cap Rate on a $500,000 Rental Property

A $500,000 rental at $4,250 a month in rent produces about $31,229 of net operating income and a 6.2% cap rate under standard expenses. It needs $4,655 in rent to reach a 7% cap rate at this price.

The NOI on a $500,000 property

Assumptions: 5% vacancy, taxes at 1.2% of price ($6,000 a year), insurance at 0.5% ($2,500), 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: $4,250 a month (0.85% of price), $51,000 a year
Collected after vacancy: $48,450
Operating expenses: $17,221 (36% of collected income)
Net operating income: $31,229, or $2,602 a month
Cap rate: 6.25%. Gross rent multiplier: 9.8

Cap rate at different rents on a $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
$2,500	0.5%	$14,870	2.97%	16.7
$3,000	0.6%	$19,544	3.91%	13.9
$3,500	0.7%	$24,218	4.84%	11.9
$4,000	0.8%	$28,892	5.78%	10.4
$4,500	0.9%	$33,566	6.71%	9.3
$5,000	1.0%	$38,240	7.65%	8.3
$5,500	1.1%	$42,914	8.58%	7.6
$6,000	1.2%	$47,588	9.52%	6.9

How property taxes change the cap rate

At $4,250 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%	$2,500	$34,729	6.95%
0.8%	$4,000	$33,229	6.65%
1.0%	$5,000	$32,229	6.45%
1.2%	$6,000	$31,229	6.25%
1.5%	$7,500	$29,729	5.95%
2.0%	$10,000	$27,229	5.45%
2.5%	$12,500	$24,729	4.95%

What this NOI is worth at market cap rates

$31,229 of NOI valued at each cap rate, and the gap to the $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 $500,000
4%	$780,725	$280,725
5%	$624,580	$124,580
6%	$520,483	$20,483
7%	$446,129	-$53,871
8%	$390,363	-$109,638
9%	$346,989	-$153,011
10%	$312,290	-$187,710

Run the $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.

$31,229 NOI / $500,000 price

Net operating income

Gross scheduled income: $51,000
Vacancy: -$2,550
Effective gross income: $48,450
Taxes and insurance: -$8,500
Maintenance, reserves, management: -$8,721
Net operating income: $31,229
Monthly NOI: $2,602
Expense ratiooperating expenses / collected income: 36%

At a 7.00% cap rate

Value of this NOI: $446,129
Priced above that by: $53,871
NOI needed at this price: $35,000
Rent needed at this pricevs $4,250 now: $4,653

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

$500,000 rental cap rate questions

What is a good cap rate for a $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 $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 $4,250 rent this one produces 6.2%.

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

About $4,655 a month, or 0.93% of price, under standard expense assumptions. For 6% it is $4,120 and for 8% it is $5,190. Lower property taxes bring each figure down.

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

At $4,250 rent with 5% vacancy, taxes of $6,000, insurance of $2,500 and 18% of collected rent for maintenance, reserves and management, net operating income is $31,229 a year, an expense ratio of 36%. Your actual taxes and insurance will move it.