What Is a Cap Rate?

A capitalization rate (cap rate) is a metric to evaluate a commercial property’s return on investment (ROI). It is calculated by dividing the property’s net operating income (NOI) by its purchase price. A higher cap rate typically indicates a higher return, but may also reflect higher risk.  

Cap Rate Calculation Example 

Cap Rate Formula: 

Cap Rate= (Net Operating Income / Purchase Price) x 100 

Example: 

Net Operating Income (NOI): $100,000 

Purchase Price: $1,250,000 

Cap Rate = (100,000/1,250,000) x 100 = 8%