Capitalization rate (cap rate)
The capitalization rate, or cap rate, expresses a property’s annual net operating income as a percentage of its value or price. It is a quick way to compare the unleveraged return of different properties.
The formula
Cap rate = net operating income / property value. A property with $60,000 NOI valued at $1,000,000 has a 6 percent cap rate. Higher cap rates generally signal higher return and often higher risk.
Is a higher or lower cap rate better?
It depends on goals. A higher cap rate means more income per dollar of value, but often comes with more risk or a less prime location. Lower cap rates often reflect safer, higher-demand assets.
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