Cap Rate (Capitalization Rate)
The capitalization rate is a property's net operating income divided by its value or purchase price. It expresses the unlevered annual return: a building bought for $10 million producing $600,000 NOI trades at a 6% cap rate. Lower cap rates mean higher prices and typically signal lower perceived risk.
Cap Rate = NOI ÷ Property Value × 100Cap rates vary by market and asset class. Stabilized multifamily in major markets typically trades at lower cap rates than hotels or suburban office, reflecting the market's view of income durability.
Cap rates also convert income to value in appraisals and underwriting: value = NOI ÷ cap rate. This is why lenders scrutinize both the NOI and the cap rate assumption — a 50 basis point cap rate change moves value by roughly 8%.
$560,000 NOI ÷ 5.5% cap rate = ~$10.2 million implied value.