Cap rate

The capitalization rate ("cap rate") measures the unlevered annual return of a rental property. It's the single most common shorthand for comparing deals.

Formula: Cap rate = Net Operating Income (NOI) ÷ Purchase Price.

Example

A $300,000 rental generating $24,000 in NOI has an 8% cap rate ($24,000 ÷ $300,000).

What it includes — and doesn't

• Includes: gross rent, vacancy, all operating expenses (taxes, insurance, management, repairs, utilities, capex reserve).
• Excludes: mortgage payments, depreciation, income tax. Cap rate is what the property earns regardless of how you finance it.

Reading the number

• 4–5%: appreciation-tilted markets (coastal metros).
• 6–8%: balanced cash flow + appreciation markets.
• 8%+: cash-flow markets, often with more operational risk.

Two deals with the same cap rate can have very different real returns once leverage, vacancy realism, and capex assumptions are considered. Cap rate is a screen, not a verdict.