What is Cap Rate (Capitalization Rate)?
Cap rate is a measure of an investment property’s return, calculated as its annual net operating income divided by its purchase price or value, shown as a percentage. It helps investors compare properties at a glance. A higher cap rate suggests higher return (and often higher risk).
Example: A rental that nets $30,000 a year and costs $500,000 has a 6% cap rate, which an investor compares against other properties’ cap rates.