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.