Most methods to evaluate residential properties are tied to the cost of financing, (rental income – mortgage payment = cash flow.) Since the cost of financing has nothing to do with the income produced by the property, the cap rates formula is useful because it expresses the net income as a percentage of the cost of the property.

Charles Lewis is a REALTOR® in the Austin area. He helps people all over the greater metro area buy and sell houses. Schedule a no-obligation phone call to find out he can help you accomplish your real estate goals.