Cap Rate (Capitalization Rate)

Cap Rate is the ratio of a property's Net Operating Income (NOI) to its current market value or purchase price.

Formula

Cap Rate = NOI / Property Value × 100

Example

A property generating $12,000/year NOI with a $200,000 value has a 6% cap rate.

Why It Matters

• Compares properties regardless of financing
• Higher cap rate = higher return (but often higher risk)
• Market-dependent: urban areas typically have lower cap rates (3-5%) vs. rural areas (7-10%)
• Does not account for mortgage payments or cash invested

When to Use

Use cap rate to quickly compare investment opportunities across different markets and property types. It's most useful for commercial and multi-family properties.