Cap rate is a property's net operating income divided by its price, a quick yardstick for comparing income properties independent of financing.
Cap rate, short for capitalization rate, is a property's net operating income divided by its price. It is a quick way to compare income properties independent of how they are financed, and to gauge the yield a building produces on its own.
Net operating income is gross rent minus operating expenses, but not the mortgage. Dividing that by the price gives the cap rate. A higher cap rate means more income per dollar of price, which can signal a better yield or a riskier location, since prime, low-risk properties tend to trade at lower cap rates. Compare only similar property types in similar markets.
Because it ignores financing, cap rate does not tell you your actual cash return after a mortgage; cash-on-cash return does that. It also excludes appreciation and one-time costs. Still, as a fast, finance-neutral yardstick, cap rate is the standard first screen investors use to size up an income property before digging deeper.
It depends on the market and property type. Lower cap rates often mean safer, prime assets; higher ones can mean more yield or more risk. Compare like with like.
No. Cap rate uses net operating income, which excludes financing, so it compares properties regardless of how they are funded.
Cap rate ignores your loan; cash-on-cash return measures the cash you actually earn after the mortgage, relative to the cash you invested.
See the exact formula and a worked example on our methodology page.