Cap Rate on a $600,000 Rental Property

A $600,000 rental at $5,100 a month in rent produces about $37,475 of net operating income and a 6.2% cap rate under standard expenses. It needs $5,585 in rent to reach a 7% cap rate at this price.

The NOI on a $600,000 property

Assumptions: 5% vacancy, taxes at 1.2% of price ($7,200 a year), insurance at 0.5% ($3,000), 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: $5,100 a month (0.85% of price), $61,200 a year
Collected after vacancy: $58,140
Operating expenses: $20,665 (36% of collected income)
Net operating income: $37,475, or $3,123 a month
Cap rate: 6.25%. Gross rent multiplier: 9.8

Cap rate at different rents on a $600,000 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
$3,000	0.5%	$17,844	2.97%	16.7
$3,600	0.6%	$23,453	3.91%	13.9
$4,200	0.7%	$29,062	4.84%	11.9
$4,800	0.8%	$34,670	5.78%	10.4
$5,400	0.9%	$40,279	6.71%	9.3
$6,000	1.0%	$45,888	7.65%	8.3
$6,600	1.1%	$51,497	8.58%	7.6
$7,200	1.2%	$57,106	9.52%	6.9

How property taxes change the cap rate

At $5,100 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%	$3,000	$41,675	6.95%
0.8%	$4,800	$39,875	6.65%
1.0%	$6,000	$38,675	6.45%
1.2%	$7,200	$37,475	6.25%
1.5%	$9,000	$35,675	5.95%
2.0%	$12,000	$32,675	5.45%
2.5%	$15,000	$29,675	4.95%

What this NOI is worth at market cap rates

$37,475 of NOI valued at each cap rate, and the gap to the $600,000 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 $600,000
4%	$936,870	$336,870
5%	$749,496	$149,496
6%	$624,580	$24,580
7%	$535,354	-$64,646
8%	$468,435	-$131,565
9%	$416,387	-$183,613
10%	$374,748	-$225,252

Run the $600,000 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.

$37,475 NOI / $600,000 price

Net operating income

Gross scheduled income: $61,200
Vacancy: -$3,060
Effective gross income: $58,140
Taxes and insurance: -$10,200
Maintenance, reserves, management: -$10,465
Net operating income: $37,475
Monthly NOI: $3,123
Expense ratiooperating expenses / collected income: 36%

At a 7.00% cap rate

Value of this NOI: $535,354
Priced above that by: $64,646
NOI needed at this price: $42,000
Rent needed at this pricevs $5,100 now: $5,584

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

$600,000 rental cap rate questions

What is a good cap rate for a $600,000 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 $600,000 property in a 5% cap rate metro is fairly priced at 5%, and one in an 8% market is fairly priced at 8%. At $5,100 rent this one produces 6.2%.

How much rent does a $600,000 property need for a 7% cap rate?

About $5,585 a month, or 0.93% of price, under standard expense assumptions. For 6% it is $4,940 and for 8% it is $6,225. Lower property taxes bring each figure down.

What is the NOI on a $600,000 rental?

At $5,100 rent with 5% vacancy, taxes of $7,200, insurance of $3,000 and 18% of collected rent for maintenance, reserves and management, net operating income is $37,475 a year, an expense ratio of 36%. Your actual taxes and insurance will move it.