The capitalization rate (cap rate) is the ratio of NOI to the asset value. NOI is the income generated after deducting all expenses. Simply put, you calculate your client’s return by subtracting all expenses from all income, and then dividing that number by the current value of the property. Cap Rate = Net Operating Income / Price Let's say your investor purchased an $80,000 single-family rental home in Detroit, and it rents for $975 per month. His or her total monthly expenses, including taxes, insurance, management fees, and repairs, might be around $393.50 per month, or $4,722 per year. This would leave your investor with an NOI of about $6,978 (cash flow). The cap rate would then be $6,978 divided by $80,000, which equals 8.74 percent. If the investor is looking to finance, then the cash on cash return might increase. In this case, the investor might only have to put down $18,000 to buy the property, including closing costs. The mortgage payment would increase expenses, but the NOI would be divided into the $18,000 versus the $80,000. Adding a monthly mortgage payment of $344 to the expenses would result in $737.50 in monthly estimated expenses, or $8,850 annually. Subtract that from the gross income of $975 per month, or $11,700 annually, and you get an NOI of $2,850. $2,850 / $18,000 down payment = 15 percent cash on cash return