Cap Rate
The capitalization rate is the ratio of a property's net operating income (NOI) to its purchase price or current market value, expressed as a percentage. It measures the expected rate of return on an investment property.
How to Calculate Cap Rate
Cap Rate = Net Operating Income (NOI) / Property Value × 100
For example, if a property generates $30,000 in NOI annually and is valued at $400,000, the cap rate is 7.5% ($30,000 / $400,000 = 0.075).
What is a Good Cap Rate?
Cap rates vary by market, property type, and risk level. Generally, 4-6% is considered low-risk (Class A markets), 6-8% is moderate, and 8%+ indicates higher risk or emerging markets. The "right" cap rate depends on your investment goals and risk tolerance.
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