Math and Finance nerds need your help! CAP rate calc

[Kate Andreeva]

Trying to calculate Cap rate for the primary residence I hold that I am trying to convert to a rental property.

Here are the numbers:

Original purchase price: $400K

Current value: $600K

Current loan amount: $300K

Planning to do a cash out refi to pull out $150K for a purchase of a new primary residence.

The expected gross rent is $3.5K per month.

Annual expected gross operating income: $40K

Annual expected cost (taxes, HOA, insurance, CapEx, maintenance, management): $20K

Net Operating income: $20K

To calculate cap rate what do I divide $20K by?

a) original loan amount of $400K, b) current value of $600K or c) new loan amount of $450K after $150K cash out refi or d) current loan amount of $300K.

Appreciate your thoughts on this!  

[Immanuel Sibero]

@Kate Andreeva

The cap rate formula is simple and calls for annual NOI divided by the original cost of the property so looking at the data you presented would be 20k / 400k. But cap rate is a valuation metric normally used in valuing a commercial properties such as office buildings, storage facilities, multifamily housing, etc.

Once you figure it out, what do you plan to do with the cap rate of this house? Are you trying to decide whether to sell this house vs. rent it out? Are you trying to decide if this house would be a good/profitable rental house? I ask because cap rate would not help with any of the above questions.

Cheers... Immanuel