Why do you exclude the mortgage payment from the cap rate?

[Thomas W.]

It seems like you would want all expenses included right? As I understand it the cap rate is telling you what percentage of the total price you'll make back in a year?

So why would you exclude the mortgage payment because that IS an expense.

[Paul Bowers]

I would assume it's because everyone's mortgage payment will be different so it would render the cap rate number useless.  I may put 50% down and do a 30 year note.  You may put 10% down and do 15 years.  That generates a huge difference in payment so we'd come up with dramatically different cap rates based on all other numbers being the same.  By basing it on a cash purchase it comes out the same for everyone.  You obviously need to count the mortgage expense in your numbers but using cap rate gives you a way to compare properties with no mortgage cost variable.