Understanding Cap Rates and ROI for Investment Properties

Cap rate (capitalization rate) measures how much income a property produces compared to its purchase price.

Cap Rate = Net Operating Income (NOI) ÷ Purchase Price

Cap rate is best for comparing similar rental properties in the same market, such as:

• Duplexes in North Tonawanda

• 3–4 unit buildings in Buffalo

• Rentals in Cheektowaga

• Single-family rentals in Amherst

• Multi-family properties in Niagara Falls

What Counts as NOI (Net Operating Income)?

NOI is the property’s income after operating expenses, before mortgage payments.

NOI typically includes:

• Rental income

• Other income (parking, storage, laundry)

NOI typically subtracts:

• Property taxes

• Insurance

• Water/sewer (if landlord-paid)

• Maintenance and repairs

• Property management (even if you self-manage, estimate it)

• Vacancy allowance

NOI does not include:

• Mortgage principal + interest

• Depreciation

• Income taxes

What Is ROI (Return on Investment)?

ROI (Return on Investment) measures how much profit you earn compared to the cash you put into the deal.

Simple ROI concept:

ROI = Annual Profit ÷ Total Cash Invested

Total cash invested often includes:

• Down payment

• Closing costs

• Repairs needed right away

• Reserves for future repairs

ROI is the number investors use to answer:

“How hard is my money working for me?”

Cap Rate vs ROI (What’s the Difference?)

Cap rate tells you how the property performs without financing.

ROI tells you how the deal performs with your financing and cash invested.

Two buyers can purchase the same duplex in Tonawanda and have:

• the same cap rate

• very different ROI

…based on down payment, interest rate, closing costs, and repair budget.

Common Mistakes Investors Make

1. Underestimating Property Taxes

Property taxes can vary widely across Western New York. Always verify taxes through the municipality or reliable public records, not just the MLS.

2. Ignoring Vacancy

Even in strong rental markets, turnover happens. A vacancy allowance protects your numbers.

3. Skipping Repairs and Capital Expenses

Older homes and multi-family properties can have big-ticket costs like roofs, furnaces, electrical, plumbing, and sewer issues.

4. Not Budgeting for Property Management

Even if you plan to self-manage, include management costs so the property still works long-term.

Simple Example (Cap Rate + ROI)

Example purchase in Western New York:

• Purchase price: $220,000

• Total rent: $2,600/month ($31,200/year)

Estimated annual operating expenses:

• Taxes: $6,500

• Insurance: $1,800

• Repairs/maintenance: $2,000

• Vacancy allowance: $1,500

• Water/sewer: $1,200

• Management estimate: $2,500

Total expenses: $15,500

NOI = $31,200 – $15,500 = $15,700

Cap Rate = $15,700 ÷ $220,000 = 7.1%

ROI will change depending on:

• down payment

• interest rate

• closing costs

• repair budget

• actual cash flow after the mortgage payment