Capitalization Rate (Cap Rate)
The ratio of net operating income to property value, used to gauge return and estimate what a property is worth.
The capitalization rate, or cap rate, is the ratio of a property's net operating income to its value or price. It expresses the unleveraged annual return a buyer would earn if they paid all cash. A $1,000,000 property with $70,000 in NOI trades at a 7% cap rate.
Cap rates move with asset type, location, and interest rates. In 2026, stabilized multifamily and industrial often trade in the 5.5 to 6.5% range, while retail, hospitality, and secondary markets run higher, roughly 7 to 8%. Lower cap rates signal higher prices and lower perceived risk.
Investors flip the formula to estimate value: divide NOI by a market cap rate. This is the income approach appraisers rely on for commercial property, which is why a small shift in the cap rate can swing value by hundreds of thousands of dollars.
Formula
Cap Rate = Net Operating Income / Property Value
Worked Example
A multifamily property generates $420,000 in NOI. Comparable sales suggest a 6% cap rate. Estimated value = 420,000 / 0.06 = $7,000,000.
Why It Matters
Cap rate is the fastest way to price a deal and compare it to alternatives. It also drives appraised value, which sets your LTV and loan proceeds, so a cap rate shift can change how much a lender will fund.
Related Terms
Related Programs and Tools
Frequently Asked Questions
What is a good cap rate?
It depends on asset type and market. A lower cap rate means a higher price and lower risk, while a higher cap rate offers more income return but usually more risk.
How do cap rates relate to interest rates?
When borrowing costs rise, buyers often demand higher cap rates to keep deals cash flowing, which pushes values down. Falling rates tend to compress cap rates.