Cap Rate (Capitalization Rate)

A cap rate (capitalization rate) is the single most common yardstick for pricing income-producing real estate. It is the property's net operating income (NOI) divided by its price or value, written as a percentage. NOI is the annual income left after operating expenses - but before mortgage payments, income tax, and depreciation.

The formula is simple:

Cap rate = NOI / property value

A worked example: a building generates $500,000 of NOI and sells for $10,000,000. The cap rate is $500,000 / $10,000,000 = 5%. If a similar building nearby trades at a 6.25% cap rate, it is cheaper per dollar of income - you pay $8M for the same $500,000 of NOI. The equation also works in reverse: divide NOI by a market cap rate to estimate value, which is how appraisers and buyers back into a price alongside comparable sales.

Cap rates measure the unleveraged yield - the return as if you bought with all cash. A lower cap rate usually means a safer, more in-demand asset (prime location, strong tenants) that buyers will accept less income for; a higher cap rate signals more perceived risk or a weaker market. Rates move with interest rates, so a figure quoted today should be read as of its date.

Cap rate is not a complete return measure. It ignores financing, future rent growth, and eventual sale price, so it is a snapshot, not a forecast. For pooled vehicles like a REIT the comparable lens is portfolio yield rather than a single asset's cap rate, and for a tokenized deal it feeds into the property's stated net asset value.

Source: CBRE Cap Rate Survey and Appraisal Institute, as of 2026.