Bozeman real estate has been attractive to investors for many years. Affluent travelers who visit Bozeman on ski trips, Yellowstone vacationers, and parents of MSU students often decide to invest in real estate here. This has brought outside investment into our valley, as is evident by the many large apartment buildings going up around town. Newer investors considering getting into real estate may come across the term Cap Rate. What is it, and how is it calculated?  Let’s take a look.

What is a Cap Rate?
Short for Capitalization Rate, a Cap Rate represents the expected annual return on an income-producing property, assuming it’s purchased with cash. In simple terms, it’s a percentage that helps investors evaluate, compare, and price income producing properties.

How to Calculate a Cap Rate
Cap Rate = Net Operating Income (NOI) ÷ Purchase Price
First, an investor must determine the Net Operating Income, or NOI. To calculate the NOI, subtract yearly operating expenses—like taxes, insurance, and maintenance (but not mortgage payments or debt service)—from the property’s gross (total) rental income. Once you have the NOI, divide it by the purchase price of the property to get the Cap Rate.

Real-World Example
Let’s say an investor buys a duplex in Bozeman for $775,000. Each unit rents for $2,250/month, generating a gross annual rent of $54,000. Annual expenses include:
• Taxes: $4,200
• Insurance: $2,500
• Water/sewer: $2,400
• Maintenance: $1,500
That’s $10,600 in total expenses, leaving a Net Operating Income of $43,400.
Now divide $43,400 by the $775,000 purchase price:
$43,400 ÷ $775,000 = 0.056 or 5.6%

That 5.6% is the Cap Rate—the investor’s projected annual return before financing, tax benefits, or appreciation.

Why Cap Rates Matter
Cap Rates provide a simple way to compare potential returns across different properties—or even against other asset classes like stocks and bonds. Just keep in mind that Cap Rates don’t factor in tax advantages, debt paydown, or potential appreciation, all of which can significantly affect actual returns.

Working Backward with Cap Rates
One can also determine a property’s value using Cap Rates. If you know the NOI and the local market Cap Rate, divide the NOI by that rate to estimate a property’s value.

Example:
If a multi-unit building produces $68,750 in NOI and the prevailing Cap Rate is 5.5%, the estimated property value would be:
$68,750 ÷ 0.055 = $1,250,000

Market Snapshot: Early 2025
Alongside Cap Rates, it helps to understand current market activity. In the first four months of 2025, 171 homes sold across the greater Bozeman area—including Four Corners, Gallatin Gateway, Bridger Canyon, and properties within Bozeman city limits. An additional 96 homes were under contract or pending as of this writing, compared to 100 pending sales at this time last year.

Note: The data reflects home sales reported through the Big Sky Country MLS and excludes private party sales, condominiums, and townhouses.