Definition: A capitalization rate expresses the relationship between a property’s annual net operating income (NOI) and its value. In a direct-capitalization calculation, cap rate = annual NOI ÷ value.
Example
A property producing $60,000 in annual NOI at a value of $750,000 has an 8% cap rate: $60,000 ÷ $750,000 = 0.08.
Keep the distinction clear
Use NOI, not gross rent or cash flow after mortgage payments. A cap rate is different from a mortgage interest rate and is not a guarantee of an investor’s total return.
Related terms
Net Operating Income (NOI) · Interest
Keep studying
Income Approach: Net Operating Income, Cap Rate, and Property Value
References: OCC Commercial Real Estate Lending handbook, value analysis
Pronunciation (US): kap-uh-tuh-luh-ZAY-shun RAYT (capitals show stress)
Pronunciation reference: Merriam-Webster
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