Finance
Capitalization Rate (Cap Rate)
Updated 2025-07-29
Definition
The ratio of a rental property's annual net operating income (NOI) to its purchase price, expressed as a percentage. Cap rate = NOI ÷ Property Value. A $400,000 property generating $32,000 in annual NOI has an 8% cap rate. Professional investors use cap rates to compare properties across markets: lower cap rates (3-5%) signal high-demand urban markets with price appreciation priced in; higher cap rates (8-10%+) signal cash-flow markets with less appreciation potential. The metric ignores financing, so it measures the underlying asset, not the deal.
Primary source: National Association of Realtors research
Related Calculators
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