Investing metrics
Capitalization rate (cap rate)
Capitalization rate is annual net operating income divided by a stated property price or value, expressed as a percentage.
Glossary
Investing metrics
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Cap rate converts one year of stabilized property income into a simple unlevered yield indicator. It does not include mortgage terms, future rent growth, capital expenditures, taxes, or sale proceeds. Always pair the percentage with the NOI period and value basis.
How capitalization rate (cap rate) works
Normalize NOI first, choose and label the denominator—purchase price, current value, or underwritten value—and divide. To infer value under a direct-capitalization assumption, divide NOI by a market-supported cap rate; do not invent that market rate from the desired price.
Formula: cap rate = annual NOI ÷ stated property price or value × 100
Worked example
A $140,000 stabilized NOI divided by a $2,000,000 value produces a 7.0% cap rate. At the same NOI, a $2,333,333 value corresponds to about 6.0%, illustrating why small rate changes materially affect indicated value.
Common mistakes and review checks
Treat the result or document as one input to a decision. Verify the current source document, definitions, dates, and transaction facts before relying on it.