Cap Rate, Capitalization Rate
Capitalization rate (cap rate) is net operating income divided by property value, expressed as a percentage, a financing-neutral measure of a property's income yield.
Cap rate is one of real estate's most fundamental valuation metrics. It measures how much income a property generates relative to its value, independent of how it's financed. This makes it ideal for comparing properties across different markets and financing structures.
Cap rate = NOI ÷ Property Value × 100. A higher cap rate indicates stronger income relative to price. STR properties often achieve cap rates of 6-12%, compared to 3-5% for long-term rentals in the same market, because STR generates premium nightly revenue at the cost of higher management intensity.
Cap rate is used by both investors and lenders. Sellers price properties using cap rate; buyers underwrite them using cap rate. Understanding local cap rate benchmarks for STR properties helps you identify over- and under-priced opportunities.
Importantly, cap rate does NOT include mortgage payments, it measures the property's intrinsic income, not your personal return on equity. For personal return analysis, use cash-on-cash return. For lender qualification, use DSCR.
Formula
Cap Rate = NOI ÷ Property Value × 100Calculate It
Quick Calculator
Cap Rate = NOI ÷ Property Value × 100
Cap Rate
9.00%
Worked Example
A property has $45,000 NOI and is worth $500,000. Cap Rate = $45,000 ÷ $500,000 × 100 = 9.0%.
Related Terms
Related Calculators
Frequently Asked Questions
What is a good cap rate for a short-term rental?+
A cap rate of 7-10% is generally considered strong for STR properties. Below 5% is marginal for STR (given management overhead). Above 10% is excellent. The right cap rate depends on your market, high-appreciation markets (coastal, resort) may have lower cap rates compensated by equity growth.
How is cap rate different from cash-on-cash return?+
Cap rate ignores financing and measures a property's income independently. Cash-on-cash return measures your actual cash return on invested equity after mortgage payments. A property with an 8% cap rate might produce a 12% cash-on-cash return with leverage, or 8% without any financing.
Does cap rate include depreciation?+
No. Cap rate is calculated using NOI (net operating income), which doesn't include depreciation, amortization, or debt service. Depreciation is a tax concept, not a cash expense, so it's excluded from cap rate calculations.
What cap rate do DSCR lenders look for?+
DSCR lenders focus on DSCR ratio (NOI ÷ debt service) rather than cap rate directly. However, a higher cap rate generally means stronger income relative to purchase price, making it easier to achieve the 1.0-1.25 DSCR most lenders require.
Can a low cap rate be a good investment?+
Yes, cap rate is just one metric. In high-appreciation markets, investors accept lower cap rates (4-6%) because annual price appreciation adds to total return. A 5% cap rate + 8% annual appreciation = 13% total return. Evaluate total return, not cap rate alone.