Cap Rate — Smart Financial Analysis
Cap Rate = NOI / Property Value. It's the real estate investor's most important metric. Average US cap rates: residential 5-8%, commercial 6-10%.
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The capitalization rate (cap rate) is NOI divided by property value, expressed as a percentage. Cap Rate = (NOI / Property Value) × 100. Average US cap rates: residential 5-8%, commercial 6-10%, industrial 5-7%. Cap rate = NOI / Property Value (unleveraged, before debt).
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Why: The capitalization rate (cap rate) is NOI divided by property value, expressed as a percentage. It's the real estate investor's most important metric — it reveals a pr...
How: Enter Property Value ($), Annual Gross Income ($), Annual Operating Expenses ($) to get instant results. Try the preset examples to see how different scenarios affect the outcome, then adjust to match your situation.
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📋 Quick Examples — Click to Load
📊 Cap Rate by Property Type
Multifamily 5-7%, Office 6-8%, Retail 6-9%, Industrial 5-7%, Hotel 8-12%
📈 Cap Rate vs Property Value
What your NOI is worth at different cap rates
🍩 NOI Breakdown
Gross income → expenses, vacancy, management → NOI
🗺️ Cap Rate by Market
Residential vs Commercial cap rates by metro
📏 The 1% Rule
Monthly rent should be ≥1% of purchase price. Your property: $5,000/mo vs 1% of $500,000 = $5,000/mo. ✓ Meets 1% rule
Cap Rate
NOI: $34,200 | GRM: 8.33
For educational purposes only — not financial advice. Consult a qualified advisor before making decisions.
💡 Money Facts
Cap Rate analysis is used by millions of people worldwide to make better financial decisions.
— Industry Data
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— NBER Research
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Cap Rate = NOI / Property Value. It's the real estate investor's most important metric. Average US cap rates: residential 5-8%, commercial 6-10%, industrial 5-7%. Low cap rate markets (NYC 3-5%, SF 4-6%) indicate high demand and lower risk. High cap rate markets (8-12%) suggest higher risk or less demand but better income returns. Cap rate is also used for valuation: Property Value = NOI / Cap Rate. A property with $60K NOI at 6% cap is worth $1M; at 8% cap it's worth only $750K. Cap rate does NOT include mortgage payments or appreciation — it's a pure income metric.
Sources: CBRE, Marcus & Millichap, NAR, CoStar.
Key Takeaways
- • Cap Rate = NOI / Property Value (expressed as %)
- • Higher cap = higher return but higher risk. Lower cap = lower risk, growth markets.
- • Property Value = NOI / Cap Rate — use reverse cap rate for valuation.
- • Cap rate does NOT include mortgage, capex, or appreciation.
Did You Know?
- • NYC cap rates: 3-5% — premium market, low risk (CBRE)
- • Midwest markets: 8-12% — higher cash flow, higher risk (Marcus & Millichap)
- • A 1% cap rate compression (7%→6%) on $1M property adds ~$166K in value
- • The 1% rule: monthly rent should be ≥1% of purchase price
- • Multifamily: 5-7%, Office: 6-8%, Retail: 6-9%, Industrial: 5-7%, Hotel: 8-12%
How It Works
The Formula
Cap Rate = NOI / Property Value. NOI = Gross Income − Operating Expenses (vacancy, management, taxes, insurance, maintenance).
Risk-Return Tradeoff
4% cap = low risk (Class A, major metro). 10% cap = high risk (Class C, secondary market). Understand what you're buying.
Reverse Cap Rate
Property Value = NOI / Cap Rate. If NOI is $50K and market cap is 6%, the property is worth $833,333.
Expert Tips
Cap Rates by Property Type
| Type | Cap Rate | Risk Level |
|---|---|---|
| Multifamily | 5-7% | Low-Medium |
| Office | 6-8% | Medium |
| Retail | 6-9% | Medium |
| Industrial | 5-7% | Low-Medium |
| Hotel | 8-12% | High |
Frequently Asked Questions
What is a cap rate?
The capitalization rate (cap rate) is NOI divided by property value, expressed as a percentage. It's the real estate investor's most important metric — it reveals a property's true earning power regardless of hype. Cap rate = Annual NOI / Property Value. A 6% cap rate means you earn $6,000 per year on a $100,000 property.
What is the cap rate formula?
Cap Rate = (NOI / Property Value) × 100. NOI = Gross Income − Operating Expenses (vacancy, management, taxes, insurance, maintenance). Cap rate does NOT include mortgage payments or appreciation — it's a pure income metric before financing.
What is a good cap rate range?
Average US cap rates: residential 5-8%, commercial 6-10%, industrial 5-7%. Low cap rate markets (NYC 3-5%, SF 4-6%) indicate high demand and lower risk. High cap rate markets (8-12%) suggest higher risk or less demand but better income returns. "Good" depends on your risk tolerance and market.
Cap rate vs ROI: what's the difference?
Cap rate = NOI / Property Value (unleveraged, before debt). ROI (or cash-on-cash) = Annual Cash Flow / Cash Invested (leveraged, after mortgage). With a mortgage, cash-on-cash can exceed cap rate due to leverage — or fall below if debt service eats your cash flow.
What are cap rates by market?
NYC and SF: 3-5% (premium, low risk). LA, Boston: 4-6%. Chicago, Dallas: 5-6%. Midwest and secondary markets: 8-12% (higher cash flow, higher risk). Cap rate reflects risk-adjusted return expectations — lower cap = lower risk, higher cap = higher risk.
How does cap rate affect property value?
Property Value = NOI / Cap Rate. A property with $60K NOI at 6% cap is worth $1M; at 8% cap it's worth only $750K. Cap rate compression (rates falling) increases values; cap rate expansion decreases them. A 1% cap rate move can shift value by 15-20%.
Key Formulas
Cap Rate = NOI / Property Value × 100
Annual return based on income.
Property Value = NOI / (Cap Rate / 100)
What to pay for target return.
Sources
- • CBRE — commercial real estate data
- • Marcus & Millichap — cap rate trends
- • NAR — National Association of Realtors
- • CoStar — market analytics
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