Capitalization Rate (Cap Rate)

It shows how much income a property produces relative to its price — like a yield on a bond, but for real estate.

Formal definition

Cap rate equals net operating income divided by property value, expressed as a percentage.

Why it matters

Investors use cap rate to compare deals quickly; too low means you may have overpaid or NOI is weak.

Where you see it

• Commercial broker offering memos
• BiggerPockets forums
• Apartment acquisition models
• Real estate finance courses
• Lender property underwriting

Worked example

1. NOI: $24,000.
2. Property value: $400,000.
3. Cap rate = ($24,000 ÷ $400,000) × 100 = 6%.
4. Interpretation: 6% annual income yield on asset value before financing.

How Business metrics calculates it

Annual NOI ÷ Property value × 100.

The range we use for status labels

On Business metrics, the status band for this KPI is roughly 5 to 8. Higher values are generally healthier in this band. Your niche can sit outside it honestly — the label is a prompt to read the coaching, not a certificate.

Where people fool themselves

Cap rate using last year’s NOI and this year’s peak asking value is how listings get 4% printed as 6%. Match year and be honest about vacancy.

Run it on your own numbers: the Residential Rental calculator.