Cap Rate
Cap rate is NOI divided by property value. It is the unlevered yield on the current income stream before debt.
Why it matters
cap rate changes what a disciplined buyer can pay, how much debt the asset can safely carry, and whether the return is coming from operations or fragile assumptions.
Formula
Cap rate = NOI / property value.Worked example
If a property has $120,000 of NOI and trades for $2,000,000, the cap rate is 6.0%.
How investors read it
Use it to kill bad deals quickly. If the back-of-envelope version does not survive conservative assumptions, do not spend five hours making it look alive.
Common mistakes
- · Treating the metric as a verdict instead of a screen.
- · Using broker-package assumptions without checking the source documents.
- · Ignoring taxes, capex, vacancy, financing terms, and timing.
Use current local data and source documents. Realist should show assumptions and date-stamp market inputs because stale inputs create fake precision.