Cap Rate and NOI: How to Calculate Rental Property Yield
2 September 2026 · The Invest-Me team — owners of a working rental business in Žabljak
Evaluating a rental property comes down to three numbers, in order: NOI (net operating income) — gross revenue minus the cost of earning it; cap rate — NOI divided by the purchase price; and payback period — price divided by NOI. Run that math on our own four-house complex in Žabljak and you get an NOI of €27,800–32,600 a year, a cap rate of 9.9–11.6%, and a payback period of roughly 8.5–10 years on a €280,000 price.
Below are the formulas themselves, a full worked example, and the mistakes that most often turn an honest calculation into a nice-looking but wrong one.
What is NOI and how do you calculate it?
NOI, net operating income, is annual gross revenue minus everything it costs to earn that revenue: the booking platform's commission, utilities, cleaning, minor repairs and consumables. Two things stay out of NOI: loan payments, if the purchase is financed, and large capital expenses like a roof replacement — those are separate line items, not operating costs.
Formula: NOI = Gross revenue − Operating expenses.
On our property: €48–56k gross per year, from the Booking export across past seasons, minus the ~15% platform commission and €13–15k of operating costs across four houses — utilities, pellets for heating, cleaning between stays, minor repairs. That nets out to €27,800–32,600.
What is cap rate, and how is it different from gross yield?
Cap rate is NOI divided by the purchase price, expressed as a percentage: Cap rate = NOI / Price × 100%. It measures the return on the asset itself, independent of how you paid for it — cash or financed.
Gross yield is a blunter number: gross revenue divided by price, with nothing subtracted. On our property, gross yield (€56,000 / €280,000) looks like 20%, while the honest cap rate is 9.9–11.6%. That near-doubling is exactly what misleads buyers when a listing states the gross figure without saying so.
What cap rate is realistic for seasonal mountain rentals in Montenegro?
Based on our own years running a seasonal rental business in the mountains, a fair range for a well-managed property of this kind is 9–12% net. Our complex sits inside that range at 9.9–11.6%, depending on the season.
A listing promising 15%+ with no export to back it up almost always means one of three things: gross quoted as net, the best month annualized, or maintenance costs quietly zeroed out. The fix is simple — ask for 12-plus months of actual reservations and rebuild NOI yourself instead of trusting the number in the ad.
How do you calculate the payback period?
The payback period is the purchase price divided by annual NOI: how many years of net income it takes to match the price you paid. Formula: Payback = Price / NOI.
On our complex: €280,000 / €27,800 ≈ 10 years in a weaker season, and €280,000 / €32,600 ≈ 8.5–9 years in a stronger one. That's not "the money comes back and then nothing" — past that point the property keeps producing the same NOI; the payback marker just shows where cumulative income catches up with the price.
Does financing change the yield?
Not the cap rate — that's a property-level number, unaffected by whether you paid cash or took a loan secured against the same property (something we help arrange on our own deal). What does change is cash-on-cash return: your actual return on the money you put in. There, loan payments come out of NOI, and the result is divided by your down payment, not the full price. The two get confused constantly: cap rate compares properties to each other; cash-on-cash tells you your personal return on invested capital.
The full math, worked through
| Metric | Weaker season | Stronger season |
|---|---|---|
| Gross revenue | €48,000 | €56,000 |
| Booking commission (~15%) | −€7,200 | −€8,400 |
| Operating costs | −€13,000 | −€15,000 |
| NOI | €27,800 | €32,600 |
| Cap rate (€280,000 price) | 9.9% | 11.6% |
| Payback period | ~10 years | ~8.5–9 years |
We break down the full seasonal math, cost line by cost line, in our case study of what four rental houses in Žabljak actually earn. For how this cap rate compares across different property types in Montenegro, see Montenegro rental yields in 2026.
Three mistakes that most often break the math
The first is treating gross revenue as profit. We see it in roughly half the listings on the Žabljak market: an "18–20% yield" that's actually gross yield with nothing deducted, relabeled as net.
The second is forgetting the OTA commission. Almost every booking in Montenegro's mountain market comes through Booking, and its ~15% commission eats a meaningful slice of revenue before operating costs even enter the picture.
The third is zeroing out repair and maintenance costs. Furniture, mattresses, appliances and linens wear out faster in a rental than in a home someone actually lives in; skip that line item and the first seasons look more profitable than they really are, until deferred wear comes due all at once.
Test the formulas on a real property: the Family House Pleme page has a yield calculator that runs the same NOI, cap rate and payback formulas as this article, on whatever occupancy scenario you choose.