Definition
Cap rate shows annual operating profit relative to purchase price—the percentage return from operations. Higher cap rates signal better returns but may indicate higher risk.
Where you’ll meet it
What am I trying to get out of this: cash flow, appreciation, or both?
See it in Buying an investment property · Step 1About this term
Cap rate is one of the most important metrics for real estate investors to evaluate property performance. A higher cap rate generally indicates better returns but may also signal higher risk. Investors use cap rates to compare properties and markets, with typical residential cap rates ranging from 5% to 12% depending on location and property type.
Pro Tip
Compare cap rates across similar properties, but remember that location and condition can justify lower rates.
Example
A property purchased for $200,000 with $15,000 annual NOI has a cap rate of 7.5%