Capitalization Rate (Cap Rate)

Cap rate answers a simple question: if you bought a property outright with cash, what annual return would its operations produce? You take the net operating income (rental income minus operating expenses, before any mortgage) and divide it by the property’s value.

Because it ignores financing, cap rate isolates the quality of the asset itself, which makes it useful for comparing one property to another or one market to another. A higher cap rate generally means a higher return but often more risk or a weaker location; a lower cap rate usually signals a premium, stable market. Cap rate is an industry convention rather than a regulated term, so always confirm how income and expenses were defined before comparing two quoted figures.