Cap Rate

Cap Rate = NOI / Property Value. It expresses the unlevered return a property generates relative to its price. A $500,000 property generating $40,000 NOI has an 8% cap rate. Cap rates are used to set purchase prices (Value = NOI / Cap Rate) and to compare deals across markets. Lower cap rates indicate higher demand or lower risk (major metros). Higher cap rates indicate higher returns or higher risk (secondary markets). In seller-financed acquisitions, the buyer uses cap rate to justify purchase price to the seller and to model the post-stabilization refinance value.