The capitalization rate, or cap rate, is one of the most widely used metrics in real estate investing. It measures the rate of return on an investment property based on the net operating income it produces relative to its value. The formula is simply NOI divided by property value, expressed as a percentage.

Cap rates vary significantly by property type, location, and market conditions. In major metropolitan areas, cap rates tend to be lower (4-6%) because properties are considered safer investments, while properties in smaller markets or riskier areas may have cap rates of 8-12% to compensate investors for additional risk.

The gross rent multiplier (GRM) is a complementary metric that divides the property price by annual gross rental income. While simpler than the cap rate because it does not account for expenses, the GRM provides a quick way to compare properties. A lower GRM suggests a better deal relative to rental income, all else being equal.