Cap Rate

Full definition

Cap rate (short for capitalization rate) is the standard first-look metric for evaluating a rental property. Calculated as annual net operating income divided by purchase price, it strips out financing and depreciation to answer a single question: what return does this property produce on the full cash purchase price? A 6% cap rate means a property producing $60,000 in annual NOI is priced at $1,000,000. Higher cap rates typically indicate higher-risk or lower-appreciation markets. Real estate investors use cap rate as a baseline for comparing deals before layering in leverage, taxes, and market-specific factors.