Key Terms
Capitalization Rate
Cap Rate = Net Operating Income ÷ Purchase Price (or Market Value)
Capitalization Rate, or Cap Rate, is a way to measure the return on a real estate investment.
Cap Rate is calculated by dividing the property's Net Operating Income (NOI) by its purchase price or market value. It expresses the expected rate of return on an investment property as a percentage, allowing investors to compare the relative value of different assets. A higher cap rate generally indicates a higher potential return, but also higher risk. Lower cap rates are typical in high-demand, stable markets.