Cap rate (capitalization rate) is a metric used to evaluate the return on investment of a rental property. It's calculated as (Net Operating Income / Purchase Price) × 100. Cap rate measures the property's income-generating potential relative to its purchase price.

What is NOI (Net Operating Income)?

NOI is the annual income from a property after all operating expenses but before financing costs. It includes rental income minus property taxes, insurance, maintenance, property management fees, and vacancy costs. NOI is a key metric used by lenders and investors to evaluate properties.

Why is cap rate important?

Cap rate helps investors compare properties regardless of financing structure. It shows the property's income potential relative to its price, making it easier to evaluate deals and compare investment opportunities across different markets.

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Purchase Price ($)

Annual Rental Income ($)

Annual Operating Expenses ($)

Includes property taxes, insurance, maintenance, property management, etc.

Understanding Cap Rate

Cap rate (capitalization rate) is one of the most important metrics for evaluating rental property investments.

Cap Rate Formula

Cap Rate = (NOI / Purchase Price) × 100

What is a Good Cap Rate?

4-6%: Premium markets. Lower risk, strong appreciation potential.
6-8%: Stable markets with good rental demand.
8-10%: Emerging markets. Higher returns but higher risk.

Frequently Asked Questions

What is cap rate?

Cap rate measures the return on investment based on the property's income relative to its purchase price.

How do you calculate cap rate?

Divide NOI (Annual Rent - Operating Expenses) by purchase price, then multiply by 100.