Definition
Cap rate = net operating income (NOI) ÷ property value (or purchase price). NOI is income minus operating expenses—not mortgage payments.
Why people use it
It strips financing to compare how efficiently two buildings turn rent into income before debt. Lower cap often implies safer market; higher cap often implies more risk or work.
Limits
Cap rate ignores financing, tax benefits, future capex, and your time. Pair with cash flow after P&I for your actual life.
Do the division carefully
Mistakes
- Using gross rent instead of NOI.
- Confusing cap rate with cash-on-cash return (which includes loan size).
Use the calculator
FAQ
- Good cap rate?
Market-dependent. Compare against similar buildings locally, not a national blog headline.