Cap rate is one of the simplest metrics in real estate investing to state, and one of the easiest to misuse. This page explains exactly what goes into Reaixo's cap rate calculation and, just as important, what it deliberately leaves out.
The Formula
What Goes Into NOI
- Gross rental income — monthly or annual rent, plus any other income (parking, laundry, storage fees).
- Vacancy allowance — a percentage deducted from gross income to reflect realistic turnover between tenants.
- Operating expenses — property taxes, insurance, HOA, management, maintenance, a capital expenditure reserve, and owner-paid utilities.
- Property value — the purchase price or current market value used as the denominator.
Effective income (gross income minus vacancy) minus operating expenses equals NOI. Financing costs — principal and interest — are never subtracted at this stage; that's what the Cash Flow methodology is for.
Why Financing Is Excluded on Purpose
Two identical properties purchased with different down payments or loan terms will show the same cap rate, because cap rate is meant to answer a specific question: how does this property perform on its own, independent of how any particular buyer chooses to finance it? That makes it useful for comparing deals on equal footing — but it means cap rate alone tells you nothing about your actual out-of-pocket return, which is what cash-on-cash return measures instead.
What This Methodology Does Not Do
It does not predict future rent growth, appreciation, or resale value, and it does not tell you whether a specific property is "worth it" — that depends on your own goals, financing and risk tolerance alongside this one metric.
Related terms: Cap Rate, Net Operating Income in the full glossary.