Capitalisation rate is net operating income divided by purchase price. It is a single number, it takes two minutes to calculate, and it filters out most bad rental deals before a showing is ever booked.
Getting the income right
Net operating income is gross rent minus every operating cost: taxes, insurance, management, maintenance, and a realistic vacancy allowance. Debt service is deliberately excluded, because cap rate measures the property, not the financing.
The number that matters
A cap rate is only meaningful against comparable properties in the same market. Five percent may be strong in one city and weak in another, so the useful comparison is always local.
If the cap rate only works after you assume zero vacancy and zero maintenance, the deal does not work.
Run the number before the emotion. A property that fails on paper rarely improves in person.
