Cap Rate
Capitalization rate is the ratio of a property's net operating income (NOI) to its current market value or purchase price. It's used to estimate the potential return on an investment property, independent of financing. Formula: Cap Rate = NOI / Property Value × 100.
Key Points
- Understanding cap rate is essential for evaluating real estate investments
- This metric helps investors compare opportunities objectively
- Our Free Snapshot tool automatically calculates relevant metrics for any property
Related Terms
Net Operating Income (NOI)
The annual income generated by an investment property after deducting all operating expenses but before debt service and taxes. NOI = Gross Income - Operating Expenses. It does not include mortgage payments, capital expenditures, or depreciation.
Cash-on-Cash Return
A metric that measures the annual pre-tax cash flow relative to the total cash invested in a property. Unlike cap rate, it accounts for financing and shows your actual return on invested capital. Formula: CoC = Annual Cash Flow / Total Cash Invested × 100.
Gross Rent Multiplier (GRM)
A quick valuation metric calculated by dividing the property price by its gross annual rental income. GRM = Property Price / Annual Gross Rent. Lower GRMs generally indicate better value, though this metric ignores operating expenses.
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