Capitalization Rate (Cap Rate)

Category: science

The rate of return on a real estate investment property based on the expected net operating income (NOI) the property will generate.

Calculated by dividing the property's Net Operating Income by its current market value or purchase price ($Cap\ Rate = NOI / Value$). Cap rates inversely mirror risk and property values: a low cap rate (e.g., 4%) indicates a premium, low-risk asset in a highly desirable market, while a higher cap rate implies increased operational risk and a lower purchase multiple.

Common Examples

• The commercial deal fell through because the seller refused to budge from a four-point-five percent cap rate, which left no safety margin for our financing costs.
• As interest rates climbed, market cap rates expanded across the logistics sector, forcing a downward revaluation of institutional portfolios.