Definition
Cap rate = NOI / property value. It expresses annual return on property value. Higher cap rates indicate better yields.
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Find my pathAbout this term
Cap rate = NOI / value. Example: $100,000 NOI / $1,000,000 value = 10% cap rate. Higher cap rates indicate better yields. Market determines cap rates based on risk/location. Lower-risk properties have lower cap rates. Increasing NOI increases cap rate. Decreasing value increases cap rate. Value = NOI / Cap rate. Relationship critical to valuation. Market analysis determines appropriate cap rate. Comparing cap rates across properties ranks attractiveness. Financing affects effective returns but not cap rate. Professional investors use cap rate extensively.
Pro Tip
Cap rate is fundamental metric. Compare against market cap rates.
Example
10% cap rate compared favorably to market average 8% cap rate.