Cap Rate (Capitalization Rate)
A rental property’s annual net operating income divided by its price — a measure of return before financing.
What does cap rate mean?
Cap rate lets investors compare properties independent of how they’re financed. A higher cap rate means more income relative to price, but often more risk or a less desirable location.
Related terms
Cap Rate — frequently asked
How do I calculate a cap rate?
Divide a property’s annual net operating income by its price or value. A building earning $40,000 net on a $500,000 price has an 8% cap rate. It estimates the unleveraged yield before financing.
What is a good cap rate?
It depends on market and risk: prime, low-risk properties may trade at 4%–6%, while higher-risk or secondary markets run 7%–10%+. A higher cap rate means more income per dollar but usually more risk.