Cap Rate Is a Starting Point, Not a Verdict

Capitalization rate compares a property's stabilized net operating income with its price or current value: cap rate = annual NOI ÷ property value. NOI is income after ordinary operating expenses, but before debt service, income taxes, depreciation, and owner-specific financing.

Worked Cap Rate Example

A property has $156,000 in annual scheduled rent, $7,800 in vacancy and credit loss, and $48,200 in operating expenses. Its NOI is $100,000. At a $1,250,000 purchase price, the cap rate is $100,000 ÷ $1,250,000, or 8.0%.

How to Interpret Cap Rate

A higher cap rate can mean more income relative to price, but it can also signal weaker tenancy, deferred maintenance, an unusual lease structure, or less predictable demand. Compare similar assets using the same NOI definition. Cap rate does not show loan payments, capital expenditures, tenant improvements, leasing commissions, resale costs, or your personal cash investment.

Worth knowing: contractual rent on a rent roll may differ from collected rent on the income statement. Reconcile both before relying on the numerator.

Model cap rate beside equity and cash flow with Snap & Map, or compare financing effects in the cash-on-cash return guide.