InvestingAll terms starting with C
Cap rate (Capitalization rate)
Also called: capitalization rate, cap
Net operating income divided by property value, the unlevered yield used to compare properties.
Cap rate expresses what a property earns relative to its price, before any financing. Because it ignores the loan, it compares the asset itself rather than a particular buyer’s deal structure.
It is only as good as the NOI behind it. An NOI that omits vacancy, management, or capital reserves produces a cap rate that flatters the property.
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Related terms
- NOI (Net Operating Income)Income after operating expenses but before debt service, taxes on income, and capital expenditures.
- Cash-on-cash returnAnnual pre-tax cash flow divided by the cash you actually invested, measuring return on money out of pocket.
- GRM (Gross Rent Multiplier)Property price divided by annual gross rent, a fast screening ratio that ignores expenses.
- Operating expensesThe recurring costs of running a property: taxes, insurance, management, maintenance, and owner-paid utilities.
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