The capitalization rate expresses a property's yearly return if you bought it with cash. It is the most common shorthand for comparing income properties.
The formula
Cap rate equals net operating income divided by purchase price. A building producing $29,600 of NOI and priced at $400,000 has a 7.4% cap rate. NOI excludes mortgage payments, depreciation and income taxes.
Interpreting cap rates
Lower cap rates usually signal lower risk or high demand, such as prime city locations. Higher cap rates suggest more risk or slower growth. A good cap rate depends on the market, asset type and your goals.
Limits
Cap rate ignores financing, appreciation and tax effects, and depends on the accuracy of expense estimates. Use it with cash-on-cash return and debt service coverage ratio to get the full picture.
Try the numbers
Use our Cap Rate Calculator to see this in practice. With its default example (Annual gross income: $48,000; Vacancy: 5%; Annual operating expenses: $16,000), it shows cap rate: 7.4%. Adjust the inputs to match your situation.
Key takeaways
- Cap rate = NOI ÷ price.
- Higher cap rates generally come with higher risk.
- Combine with other metrics.
This article is for general education and is not personalized financial, tax or legal advice. Rules and limits change; confirm current figures with official sources such as IRS.gov, SSA.gov and StudentAid.gov, or consult a qualified professional. © 2026 FinanzCalc.