Cap Rate

CAP rate is short for Capitalization Rate. Net operating income as a percentage of property value.

Example Result

Sample Data

5.34%

Based on a sample $385,000 property with $2,850/month rent, 20% down, 7% interest rate.

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Cap Rate Formula

Net Operating Income / Property Value x 100

$20,566 / $385,000 x 100

5.34%

How This Value Changes Over Time

At Purchase / Year 1 Net Operating Income / Property Value x 100

Over Time (Year 5) NOI grows with rents; Property Value grows with appreciation rate

What This Means

A sample property priced at $385,000 with $2,850/month rent has a cap rate of 5.34% at Purchase (Month 0). Think of it as the return you would get if you bought the property with all cash — it still ignores appreciation and tax benefits. It lets you compare properties of different sizes, locations, and price points on an apples-to-apples basis. Higher cap rates mean higher relative income but often come with higher risk. Most residential investors target 5–10% cap rates.

Where This Value Comes From

Cap Rate is not entered directly — it is calculated from Net Operating Income, Property Value, and Appreciation Rate. See the formula breakdown above and the detailed inputs below.

Inputs That Determine Cap Rate

Net Operating Income

Income remaining after all operating expenses but before debt service.

$20,566

Purchase

Property Value

The current estimated market value of the property.

Found on your licensed appraisal

$385,000

Purchase

Appreciation Rate

The expected annual property value appreciation rate.

Found on your fhfa house price index

3.00%

Purchase

Calculations That Use Cap Rate

Value Based on Cap Rate

Valuation Metrics

$396,550

Purchase

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Why It Matters

Think of it as the return you would get if you bought the property with all cash — it still ignores appreciation and tax benefits. It lets you compare properties of different sizes, locations, and price points on an apples-to-apples basis. Higher cap rates mean higher relative income but often come with higher risk. Most residential investors target 5–10% cap rates.

Detailed Explanation

The Capitalization Rate (Cap Rate) is perhaps the most widely used metric in commercial real estate. It measures the rate of return on a property based on NOI relative to its current market value, independent of financing. Think of it as the return you would get if you bought the property with all cash.