Cap rate — short for capitalization rate — is the most widely used metric for valuing and comparing income-producing commercial properties. It measures a property's yield based on its income alone, ignoring financing.
Where NOI (Net Operating Income) is gross rental income minus operating expenses, before debt service. Property Value is the current market price or purchase price.
A strip center generates $180,000/year in gross rent. After vacancy (5%), property management (8%), insurance, taxes, and maintenance, operating expenses total $60,000/year.
NOI = $180,000 − $60,000 × 0.95 = $111,000
Purchase price: $1,400,000
Cap Rate = ($111,000 / $1,400,000) × 100 = 7.93%
There's no universal answer — cap rates vary by market, asset class, and risk profile. Higher cap rate = higher yield, but also higher perceived risk.
| Asset Class | Typical Cap Rate Range |
|---|---|
| Class A Multifamily (Primary Markets) | 3.5% – 5.5% |
| Class B/C Multifamily | 5.5% – 7.5% |
| Industrial / Warehouse | 5.0% – 7.0% |
| Retail Strip / NNN | 5.5% – 8.5% |
| Office | 6.0% – 9.0% |
| Hospitality | 7.0% – 11.0% |
Cap rates compress in hot markets and expand in downturns — the same property can trade at a 4.5% cap in 2021 and a 6.5% cap in 2024.
Looking for current market benchmarks? See current cap rates by city and property type →
Cap rate ignores financing, which means two investors buying the same property with different leverage will see the same cap rate but very different cash-on-cash returns. It also ignores appreciation, capital expenditures, and lease structure. A property with a high cap rate but a single tenant on a short lease carries different risk than the number suggests.
Use cap rate alongside cash-on-cash return, DSCR, and NOI analysis for a complete picture.
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