Metrics
What Is a Cap Rate?
The capitalization rate, or cap rate, is the annual return an income property produces before any financing, expressed as a percentage of its price.
Cap rate = Net operating income ÷ Price × 100
A property with $250,000 of net operating income priced at $3,500,000 has a 7.14% cap rate. Because it ignores your loan, the cap rate lets you compare two properties on the same footing and translate a rate into a price: at a fixed NOI, a lower cap rate means a higher value.
The number is only as honest as the NOI behind it, and sellers quote cap rates on optimistic NOI. Rebuild the NOI first, then the cap rate you compute is one you can defend. Try it on the cap rate calculator, and see how it fits the full picture in the four numbers every deal comes down to.
See it on a real deal
RVP Underwriter computes this from your documents automatically, with every figure shown and sourced. Underwrite a deal free.
Questions
Is a higher or lower cap rate better?
It depends on your role. For a buyer, a higher cap rate means a lower price for the same income, but often more risk. Sellers want lower cap rates (higher prices). The right cap rate reflects the asset's quality and risk.
Related terms
Part of the RVP Underwriter glossary of income-property underwriting terms. Browse all definitions, or put them to work with the free calculators.