The capitalization rate — “cap rate” — is the annual net operating income a property produces divided by its price or value. It expresses the property's yield as a percentage, independent of financing. Two investors buying the same building at the same price have the same cap rate even if one pays all cash and the other borrows 75%. That's what makes it the standard yardstick for comparing one deal to another.
$55,020 of NOI on an $850,000 property is a 6.47% cap rate.
What is NOI (and what it leaves out)
Net operating income is annual gross rental income minus annual operating expenses:
- Property taxes — verify the actual figure for the specific parcel; NJ rates swing widely by municipality.
- Insurance — landlord/hazard, plus flood where required.
- Management — typically 6–10% of collected rent, even if you self-manage (it's real labor).
- Maintenance & repairs — ongoing upkeep.
- Vacancy / credit loss — a reserve for empty units and non-payment.
NOI deliberately excludes your mortgage (principal and interest), depreciation, income taxes, and one-time capital expenditures like a roof or HVAC replacement. Excluding debt is exactly what makes the cap rate an unlevered, property-level number. To bring financing into the picture, you want cash-on-cash return or DSCR instead.