Cap Rate (Capitalization Rate)

The capitalization rate is a property's net operating income divided by its value or purchase price — the unlevered current yield on a real estate asset. Equivalently, value = NOI ÷ cap rate, making the cap rate the real-estate analog of an inverse earnings multiple (a 5% cap rate ≈ 20x NOI).

Lower cap rates mean higher valuations and signal lower perceived risk or higher expected growth — prime assets in gateway markets trade at lower cap rates than secondary-market or riskier property types. Cap rates move with interest rates (via the risk-free rate plus a risk premium, less expected NOI growth), so rising rates generally pressure cap rates upward and values downward, though the spread to Treasuries is not constant.

Convention notes: cap rates can be quoted on in-place or forward NOI, and 'going-in' vs 'exit' (terminal) cap rates bracket a hold-period underwriting; exit caps are often assumed at or above going-in caps for conservatism.