What is CAP Rate and Why Does It Matter?

February 06, 2025 • Estimated Reading Time: 2 minutes

Let's discuss the CAP rate, short for capitalization rate.

What is CAP Rate?

The CAP rate is a metric used to evaluate the potential return on an investment property - aka the return on capital. It's calculated by taking the net operating income (NOI) of the property and dividing it by the current market value.

Why Does it Matter?

  1. Investment Comparison: CAP rates help investors compare different properties to determine which offers a better return on investment.

  2. Risk Assessment: A higher CAP rate generally indicates a higher risk, but also a higher potential return.

  3. Property Valuation: Investors can use the NOI and the desired CAP rate and back into a property valuation, which can be useful in making an offer.

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