What Capitalization rate (cap rate) means
Cap rate asks how much NOI the property produces relative to its price or current value, without considering the buyer's loan, tax position, or future sale.
Use stabilized NOI when comparing stabilized assets, and label it clearly when the current property is not stabilized.
Use the same value basis across comparisons. Purchase-price cap rate and current-value cap rate answer different questions.
Cap-rate example
- Annual NOI: $17,760
- Purchase price: $240,000
Result: $17,760 / $240,000 = 7.4% cap rate.
When investors use it
- Screening income properties in one market
- Comparing price with operating income
- Estimating value from a market cap rate
- Checking whether projected NOI supports the asking price
Common mistakes
- Using gross rent instead of NOI
- Including mortgage payments in NOI
- Comparing cap rates from different expense assumptions
- Assuming a higher cap rate always means a better deal rather than potentially higher risk
Frequently asked questions
What is a good cap rate?
There is no universal good cap rate. Property type, condition, location, lease risk, growth expectations, and interest rates all affect the return investors require.
Does cap rate include financing?
No. That is why cap rate is useful for comparing properties but cannot tell you the return on the cash you invest.
Can cap rate be used for a vacant property?
Only with care. A projected stabilized cap rate can be useful, but it should not be presented as current operating performance.
This guide is educational and does not provide investment, lending, tax, legal, or appraisal advice. Verify inputs and requirements for the specific property, lender, and jurisdiction.
Put the metric inside a complete deal.
PropLurk keeps acquisition inputs, financing, expenses, returns, and the decision record together.