A cap rate (short for capitalization rate) is a quick way real estate investors measure the yearly return a property generates from its operations compared to what the property is worth.

Simple definition

Think of cap rate as: “If I bought this property in cash today, what percent return would I earn each year from rent after expenses?”

  • It’s used for income properties: rentals, apartment buildings, offices, etc.
  • It ignores loans/mortgages and focuses only on the property’s own income and expenses.

The formula (no fluff)

The basic cap rate formula is:

Cap Rate = Annual Net Operating Income ÷ Current Market Value

Where:

  • Net Operating Income (NOI) = rent and other income minus normal operating expenses (taxes, insurance, maintenance, management, utilities, etc.), but before loan payments.
  • Current Market Value = what the property is worth today or its purchase price.

Example:

  • NOI = 18,000 a year
  • Property value = 300,000

Cap rate = 18,000 ÷ 300,000 = 0.06 → 6% cap rate.

What a cap rate tells you

  • Return snapshot : A 6% cap rate means the property’s yearly NOI is 6% of its value.
  • Risk feel :
    • Higher cap rate = usually higher risk, higher potential return (maybe weaker location, older building, more vacancy).
* Lower cap rate = usually lower risk, lower return (prime area, strong tenants, more competition to buy).
  • Quick comparison : Investors use cap rates to line up multiple deals side‑by‑side to see which broadly fits their risk/return comfort.

A common rule of thumb: many commercial investors look for cap rates somewhere in the mid‑single to low‑double digits (roughly 4–10%), but “good” depends heavily on market, property type, and your risk tolerance.

One‑line takeaway

Cap rate is just the property’s annual income after expenses but before debt , divided by what it’s worth, giving you a simple percentage return to compare investment properties.

Information gathered from public forums or data available on the internet and portrayed here.