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REITs & real estate

Capitalization Rate Cap Rate

A property's annual net operating income divided by its value — the unleveraged yield a building produces at its current price.

Published by Quintessentia Network Inc. · Updated 17 July 2026 · Sources & disclosures
Formula
Cap Rate = Net Operating Income (NOI) / Property Value

What it is

The capitalization rate, or cap rate, expresses an income-producing property's annual net operating income (NOI) as a percentage of what that property is worth or sold for. It is used across offices, warehouses, shopping centres and apartment buildings alike. NOI is the rent and other income a building collects after operating costs like maintenance, property taxes, insurance and management, but before mortgage interest, income tax, depreciation and capital spending. Because financing is excluded, the cap rate describes the property itself rather than how a particular owner paid for it. It is a snapshot of one year, not a projection of what the building will earn over time — and because capital spending sits outside NOI, it is not the cash an owner ends up keeping.

Why it matters

Cap rate is the common language real estate uses to compare buildings that differ in size, price and location, in the same way an earnings yield lets you compare companies. It also works in reverse: with a market cap rate for a property type and area, an appraiser can estimate value from NOI. Because value sits in the denominator, cap rates and prices move inversely — the same NOI at a lower cap rate implies a higher price. Cap rates are also read as a rough gauge of perceived risk and expected growth: buildings seen as riskier or slower-growing tend to change hands at higher cap rates. It says nothing about debt costs or after-tax outcomes.

How it's calculated

Start with twelve months of net operating income: gross rental and other income, less vacancy and credit losses, less operating expenses such as property taxes, insurance, utilities, repairs and management. Deliberately exclude mortgage principal and interest, income tax, depreciation, and capital expenditures. Divide that NOI by the property's purchase price, appraised value, or current market value. NOI may be trailing (the last twelve months collected) or forward (the next twelve as underwritten), and the two can differ materially, so the basis matters when comparing. Cap rates are not standardized or audited — brokers, appraisers and owners each publish their own.

FAQ

Does a higher cap rate mean a better property?
No — it means a lower price relative to current income, and markets usually price that way for a reason. Higher cap rates often accompany properties seen as riskier, less liquid, in weaker locations, or with less expected rent growth; lower cap rates often attach to assets seen as safer or faster-growing. The cap rate measures the relationship between income and price at a point in time. It does not rank quality, and it cannot tell you whether the market's pricing is right.
Why is the mortgage left out of the calculation?
Because the cap rate describes the building, not the buyer. Two people can buy the same property with different amounts of debt at different interest rates; including financing would produce two different cap rates for one asset and make comparison impossible. Removing debt and income tax leaves an unleveraged figure that can be set beside other properties. The trade-off: it says nothing about what an owner actually keeps after paying lenders and taxes.
How is a cap rate different from a REIT's dividend yield?
They measure different layers. A cap rate applies to a single property: NOI over that property's value, before debt. A REIT's dividend yield applies to the whole listed company: dividends per share over the share price, after the REIT has paid interest on its borrowings, corporate overhead and everything else. A REIT owning buildings at a given cap rate can show a yield that is higher or lower depending on its leverage, expenses and payout choices.
Related terms
Net Operating IncomeFunds From OperationsAdjusted Funds From OperationsREITDividend YieldFree Cash Flow
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