Cap rate
Capitalization rate
The capitalization rate is net operating income divided by price, expressed as a percentage. Read it as the unlevered annual yield the property throws off at the price you pay. Because it excludes financing, it is the only return metric that lets you compare a cash purchase against a leveraged one, or your market against another.
Cap rate = NOI ÷ purchase price
Worked example
$19,310 of NOI on a $265,000 purchase price is a 7.29% cap rate.
Every example in this glossary uses the same deal: a $265,000 duplex renting for $2,650 a month, bought with 25% down at 6.75% over 30 years, producing $19,310 of net operating income.
The mistake to avoid
Where this is calculated
The cap rate calculator computes this from your own numbers and shows the arithmetic expanded. Net operating income divided by price, with every expense line shown and the debt service deliberately left out.
Related terms
- Cash-on-cash returnCash-on-cash return is annual pre-tax cash flow divided by the total cash you actually put into the deal — down payment, closing costs and rehab.
- Gross rent multiplierGross rent multiplier is purchase price divided by gross annual scheduled rent.
- Internal rate of returnInternal rate of return is the annual discount rate at which the deal's cash flows — the money in at purchase, the cash flow each year and the net proceeds at sale — net out to zero.
- Equity multipleEquity multiple is total cash returned divided by total cash invested, with no adjustment for time.
- Break-even occupancyBreak-even occupancy is the occupancy at which annual pre-tax cash flow is exactly zero — the share of gross potential income the property must collect to cover operating expenses and debt service with nothing left over.
Back to the full glossary — 20 terms with formulas and worked examples.