Capitalization Rate (Cap Rate)

The capitalization rate (cap rate) is the rate of return used to estimate the value of income-producing real property based on its income.

• Used in the income approach to value
• Expressed as a percentage
• Reflects risk, return, and market conditions
• Higher cap rate = higher risk / lower value
• Lower cap rate = lower risk / higher value

• Cap Rate = Net Operating Income (NOI) ÷ Property Value
• Value = NOI ÷ Cap Rate

• Gross income minus operating expenses
• Excludes mortgage payments, depreciation, and income taxes

• NOI: $50,000
• Cap rate: 5%
• Value = $50,000 ÷ 0.05 = $1,000,000

• Cap rate is a rate of return, not an interest rate
• Used only for income-producing property