Does cap rate include the mortgage payment?
No. Cap rate is unlevered, which means NOI is calculated before any financing. Principal and interest never come out of it, and neither does depreciation or income tax. Subtracting the mortgage is the single most common cap-rate mistake there is.
Why it matters
The whole point of cap rate is to compare properties, not financing. Two identical buildings have the same cap rate whether one is paid in cash and the other is 80% leveraged. Put the mortgage into NOI and you are no longer measuring the property — you are measuring your loan.
What it does to the number
Subtracting a $1,500 monthly payment from NOI on a $250,000 property drops NOI by $18,000 a year. On a property that would have shown an 8% cap rate, that reports 0.8% instead. Every comparison you make from that point is meaningless.
Worth knowing
- Cap rate = NOI ÷ property value. NOI stops above the debt line.
- The metric that DOES account for the mortgage is cash-on-cash return.
- This is why a cash buyer and a leveraged buyer quote the same cap rate on the same building.
- Principal paydown belongs in total return, not in NOI and not in cash-on-cash.
The rule this calculator locks
Cap rate is UNLEVERED. NOI never subtracts debt service, depreciation, or income tax.