Cap Rate (Capitalization Rate)

Category: finance

The rate of return on a real estate investment property based on the income that the property is expected to generate.

Calculated by dividing the NOI by the current market value of the property. A 5% cap rate means the property generates 5% of its value in cash each year. Lower cap rates indicate lower risk (and higher prices), while higher cap rates indicate higher risk and potential return.

Common Examples

• The building was sold at a 4.5% cap rate, reflecting its prime location and fully stabilized, long-term tenant base.
• In a rising interest rate environment, cap rates typically expand to compensate investors for the higher cost of borrowing.