A capitalization rate, or cap rate, compares a property’s annual net operating income with its purchase price or market value.
It is calculated as:
Net Operating Income ÷ Property Value
Cap rates can help investors compare properties, but they should not be considered by themselves. Property condition, tenant quality, leases, location, operating expenses, and risk all affect the strength of an investment.
For a fuller explanation, see our guide to commercial real estate cap rates.