Cap Rate

Real Estate

Capitalization Rate (Cap Rate) is annual net operating income divided by property purchase price, expressed as a percentage. A property generating $50,000 net operating income purchased for $1,000,000 has a 5% cap rate. Cap rates are the standard valuation metric for commercial real estate and rental properties. Higher cap rates indicate higher yield (typically with higher risk or worse location); lower cap rates indicate premium properties. Major US markets vary widely: NYC, SF Bay 3-5% cap rates; secondary markets 6-8%; tertiary markets 8-12%. Cap rates move inversely with interest rates — rising rates compress real estate values. Compare cap rates across similar properties for purchase decisions.