Capitalization Rate (Cap Rate): A metric used in real estate investing to indicate the rate of
return on an investment property. It is calculated as the property’s net operating income (rental
income minus operating expenses) divided by the property’s current market value, expressed as
a percentage. A cap rate helps compare investment opportunities – generally, a higher cap rate
implies a better return (but often with higher risk). Example: The small apartment building
generates $100,000 in net income a year and is valued at $1.25 million, so it has a cap rate of 8%
(100,000/1,250,000), which is quite attractive in that market.
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