Capitalization Rate (Cap Rate)

What is Cap Rate?

The capitalization rate (cap rate) is the most widely used metric for evaluating and comparing income-producing properties. It equals net operating income divided by the current market value and represents the unleveraged yield — the return an investor would receive if the property were purchased entirely with cash. Cap rates are market-specific: gateway cities like New York and San Francisco typically see cap rates of 3–5%, while secondary markets may offer 6–10%. A rising cap rate signals either higher income or falling prices (or both), and vice versa. Lenders and appraisers use cap rates to determine property values by dividing NOI by the prevailing cap rate.