Investing tool
Capitalization rate measures the unlevered annual return on a property. Enter the annual net operating income and the property price or value to get the cap rate.
Formula: Cap rate = (annual net operating income / property value) x 100
Cap rate expresses annual NOI as a percentage of value, so it lets you compare properties independent of financing. A higher cap rate implies higher return and usually higher risk; a lower cap rate implies a more stable, often more expensive market.
Typical residential cap rates fall in a 4% to 10% band depending on the market, asset quality, and interest-rate environment. Use NOI that excludes mortgage payments, since cap rate is an unlevered measure.
FAQ
It varies by market, but many residential investors look for roughly 5% to 8%. Higher cap rates suggest more return and more risk.
No. Cap rate uses net operating income, which excludes debt service, so it measures the unlevered return.
