Cap Rate
Real Estate / CashflowCap rate (capitalization rate) is a property’s annual net operating income (NOI) divided by its current market value or purchase price. It expresses the unlevered annual return an investor would earn if they paid all cash — before debt service, taxes, or depreciation. A 6% cap rate means the property returns 6% of its value in net income each year.
How it works. Cap Rate = NOI ÷ Property Value. If a building generates $60,000 in NOI and sells for $1,000,000, the cap rate is 6%. Investors use cap rates to compare properties across different price points and markets — a higher cap rate generally means more income relative to price (but often more risk), while a lower cap rate suggests a premium asset in a strong market (less yield, more stability).
| Scenario | NOI | Price | Cap Rate |
|---|---|---|---|
| High-yield market (Midwest) | $60,000 | $600,000 | 10% |
| Growth market (Sun Belt) | $60,000 | $1,000,000 | 6% |
| Coastal premium | $60,000 | $1,500,000 | 4% |
Cap rate is not total return. It excludes leverage (mortgage debt), appreciation, tax benefits, and transaction costs — all of which dramatically affect real investor returns. It is a screening tool, not a full underwriting model. Use it to filter deals; use cash-on-cash return and IRR to decide.
For using cap rates in market analysis, see best cashflow markets. For applying the same yield logic to business acquisitions, see how to value a business.