Question 1

What is a cap rate in real estate?

Accepted Answer

A capitalization rate (cap rate) expresses a property's annual net operating income (NOI) as a percentage of its market value. Formula: Cap Rate = NOI ÷ Property Value × 100. It is used to compare investment properties independently of financing.

Question 2

What is a good cap rate for an investment property?

Accepted Answer

A good cap rate typically falls between 4% and 10% depending on market and risk. In high-demand urban markets (NYC, LA, SF), 4–6% is normal. In smaller or mid-tier markets, 7–10%+ is more common. Lower cap rates signal lower risk; higher cap rates signal higher potential returns with more risk.

Question 3

How do you calculate cap rate?

Accepted Answer

Cap Rate = Net Operating Income (NOI) ÷ Property Value × 100. First calculate NOI by subtracting all operating expenses (excluding mortgage) from gross rental income. Then divide NOI by the property's purchase price or current market value.

Question 4

Does cap rate include mortgage payments?

Accepted Answer

No. Cap rate uses NOI, which excludes mortgage payments, depreciation, and income taxes. It is a pre-financing metric designed to evaluate a property's income potential independently of how it is financed.

Question 5

What is the difference between cap rate and cash-on-cash return?

Accepted Answer

Cap rate ignores financing and evaluates the property itself. Cash-on-cash return reflects your actual leveraged return based on the cash you invested. Use cap rate to compare properties; use cash-on-cash to evaluate your specific deal with your specific financing.

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