Definition
Cap rate is the real estate equivalent of an earnings yield, expressing the expected rate of return on a property investment. Lower cap rates indicate higher prices relative to income (more expensive). Cap rates vary by property type, location, and risk: trophy office buildings may trade at 4-5% while secondary industrial properties may trade at 8-10%.
functions Formula
Cap Rate = Net Operating Income / Property Value × 100%
lightbulb Example
A property generates $500K NOI and is valued at $6.25M. Cap rate = 8.0%. If comparable properties trade at 7% cap rates, this property appears to offer above-market returns.
verified_user Key Points
- Lower cap rate = higher relative price
- Varies significantly by property type and location
- Inverse of the price-to-income ratio
- Does not account for financing or capital expenditures