What does a 7.5% cap rate mean?

A cap rate of 7.5% means that the property generates an NOI equivalent to 7.5% of the purchase price. This percentage can help investors assess the potential return on their investment.

For a $250,000 vacation rental property, an NOI of $18,750 would indicate a cap rate of 7.5%. This calculation is straightforward: $18,750 divided by $250,000 equals 0.075, or 7.5%.

A vacation rental property can generate a significant return on investment through its annual net operating income (NOI).

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The cap rate is a crucial metric used to evaluate the profitability of a rental property. It represents the annual NOI as a percentage of the property's purchase price.