Capitalization RateCap Rate
Quick answer
A capitalization rate is net operating income divided by property value, expressing the unlevered yield a property produces at its purchase price.
The cap rate converts income into value. A property producing $1,000,000 of NOI purchased at a 5.5% cap rate is worth roughly $18,200,000. Cap rates compress when capital is abundant and expand when interest rates rise, which is why exit cap rate assumptions are among the most scrutinized inputs in any underwriting model.
Formula
Cap Rate = Net Operating Income ÷ Property Value
Example: $1,000,000 NOI ÷ $18,200,000 value = 5.5% cap rate
Related product: Acquisition Financing
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