Cap Rate Example: Comparing Two Rental Properties

Scenario overview: two fictional rental properties

An investor is screening two fictional stabilized rentals. Property A has a $280,000 price and $2,700 of monthly scheduled rent. Property B has a $390,000 price and $3,600 of monthly rent. The goal is to compare operating income with value before considering a mortgage, down payment, investor tax position, or appreciation.

These figures are solely an educational example. They are not listings, market averages, appraisals, or recommendations. Both properties use a 5% maintenance allowance based on gross scheduled rent and a 8% management allowance based on effective income because those are the calculator’s definitions. Other income is shown as $0 for both: the current Cap Rate Calculator has no separate other-income input, so the example does not invent one outside its contract.

Using the same categories does not mean forcing identical dollar expenses. Property B has higher tax, insurance, association dues, and other costs. Consistency means calculating each line on the same basis and verifying it with equivalent evidence. Omitting HOA from one property while including it for the other would make the comparison less meaningful.

Calculate Property A from income to cap rate

Property A schedules $32,400 of annual rent. A 5% allowance removes $1,620.00, leaving $30,780.00 of effective rental income. Maintenance is based on gross scheduled rent, while management is based on effective rental income.

The result expresses annual NOI as a percentage of the selected value. It does not represent cash received by an investor after financing. It also does not say whether the rent is sustainable, whether repairs are adequately reserved, or whether the value assumption is defensible. Those inputs must be examined before the percentage is useful.

Calculate Property B with the same methodology

Property B schedules $43,200.00 of annual rent, which is more than Property A. Its 5% vacancy allowance produces effective income of $41,040.00. The same maintenance and management definitions are used, but the larger revenue base and property-specific fixed costs create different dollar amounts.

Property B produces more NOI in absolute dollars, but it also requires a larger value denominator. Cap rate relates those two amounts. A property can therefore produce more net income while offering a lower NOI-to-value ratio. Neither fact alone determines which property better fits an investor’s capital, risk, workload, financing, or return objectives.

Compare NOI and cap rate side by side

Property B’s NOI exceeds Property A’s by $5,499.20. Its cap rate differs by 0.71%. The comparison makes the distinction visible: absolute NOI measures dollars generated before financing, while cap rate scales NOI to property value.

A higher cap rate is not proof that a property is better. It may reflect a lower price, stronger income, deferred maintenance, less durable rents, location risk, tenant concentration, operational complexity, or an inaccurate value. A lower cap rate may accompany a different risk profile, but it can also result from overpricing or understated expenses. The ratio identifies a question; it does not answer every question.

Sensitivity: double Property B vacancy to 10%

The alternative case changes only Property B’s vacancy assumption, from 5% to 10%. Price, rent, tax, insurance, HOA, other expenses, maintenance rate, and management rate remain unchanged. Because management depends on effective income, the calculator updates that expense when collected income falls.

The increased vacancy reduces effective income, NOI, and cap rate. Some management expense falls with income, while tax, insurance, HOA, other costs, and the maintenance convention do not. Property A remains unchanged, so the original cap-rate ordering does not reverse in this particular stress. That is a result of these inputs, not a universal rule.

The value of the test is causal clarity. If vacancy, rent, expenses, and value all changed simultaneously, it would be difficult to explain why the comparison moved. An analyst can run additional single-variable cases after documenting this one, including a tax increase, insurance renewal, or supported revision to value.

What the comparison shows and what still needs diligence

The comparison shows that Property A and Property B convert value into NOI at different modeled rates. It does not measure the cash needed to close, the mortgage available to a particular borrower, post-debt cash flow, expected renovation costs, income taxes, appreciation, liquidity, or sale proceeds. Those are separate analyses with their own assumptions.

Before using either cap rate, verify executed leases, concessions, collection history, and responsibility for utilities. Review tax bills and reassessment exposure, obtain insurance quotes, inspect major components, examine association budgets and special assessments, and identify recurring costs missing from the simplified input set. Confirm whether the selected property value is a purchase price, current market estimate, or another consistently applied basis.

Expense methodology also deserves review. The calculator applies maintenance to gross rent and management to effective income. A management contract may use collected rent plus leasing fees, while a physical inspection may support a dollar maintenance budget rather than a percentage. Reconcile those differences instead of treating the calculator convention as a substitute for source documents.

Comparison quality also depends on matching scope. If one property’s NOI includes owner-paid utilities, payroll, landscaping, or recurring service contracts that are absent from the other model, the cap rates are not yet comparable. Build a reconciliation table, identify every included and excluded cost, and normalize only where reliable property evidence supports the adjustment.

The practical conclusion is that Property B’s higher NOI does not automatically make its cap rate higher, and Property A’s higher modeled cap rate does not automatically make it the preferable property. The outputs narrow the next questions: why do the values and expenses differ, how durable is each income stream, and what risks are being compensated by the observed ratio?