Glossary
Capitalization rate (cap rate)
The ratio of a property's net operating income to its value or price — a quick measure of expected return used to value income property.
The capitalization rate, or cap rate, is net operating income divided by property value (or purchase price). It expresses the unleveraged annual return a property would produce at its current price and is the most common shorthand for pricing income-producing real estate.
Because cap rate is derived from NOI, the reliability of the underwriting — accurate income and expenses, reconciled to the documents — determines whether the implied value is trustworthy.
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