Cap Rate (Capitalization Rate)
Cap rate is a property's annual net operating income divided by its purchase price, expressed as a percentage — a quick way to compare income-producing properties.
What it means
Cap rate = NOI ÷ Purchase Price. It is the unlevered yield on the property in year one — what the property would return in cash flow if you bought it for all cash.
Cap rates are not returns. They ignore financing, tax, appreciation, and reserves. They also vary by asset class, market, tenant credit, and lease term. A 7% cap rate on a Walgreens with 15 years remaining is a very different investment from a 7% cap rate on a short-term multi-tenant office.
Investors use three cap-rate flavors: going-in (cap rate at purchase), stabilized (projected cap rate once occupancy and rent hit pro forma), and exit (cap rate assumed at sale in underwriting). Exit cap movement is the single largest source of underwriting error in CRE.
Example
A property generates $200,000 NOI and sells for $3,000,000. Cap rate = 200,000 / 3,000,000 = 6.67%.