What is Capitalization Rate (Cap Rate)?
The short answer
The capitalization rate (cap rate) is a property's annual Net Operating Income divided by its market value or purchase price, expressed as a percentage. Cap Rate = NOI ÷ Value. It estimates the unlevered annual return and is the standard way to compare income properties and gauge whether a price is reasonable.
What is a 'good' cap rate?
It depends on market and risk: lower cap rates (4–5%) reflect lower-risk, high-demand markets with pricier assets; higher cap rates (7–9%+) reflect higher risk or weaker markets. A cap rate is only as good as the NOI behind it — inflated income or understated expenses produce a misleading number.
Capitalization Rate (Cap Rate) — FAQ
Cap rate vs. cash-on-cash return?
Cap rate is unlevered (ignores your mortgage) and measures the asset; cash-on-cash return factors in financing and measures the return on the actual cash you invested.
Related terms
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