The capitalisation rate, or cap rate, compares a property’s net operating income with its price. It gives investors a quick way to compare returns across properties and markets.
The calculation
Divide annual net operating income by the property’s value or purchase price.
What it tells you
Higher cap rates usually mean higher returns but also higher perceived risk.
Its limits
Cap rates ignore financing, future growth and capital spending. Use them as a starting point, not a verdict.
Key takeaways
- The calculation
- What it tells you
- Its limits
