◈ GLOSSARY · REAL ESTATE
Cap Rate (Capitalization Rate).
A definition, in plain English — with the books that teach it.
ClearValue Books · reviewed against sources ·
◈ DEFINITION
What it means
Definition
Cap rate is the annual net operating income of a property divided by its purchase price, expressed as a percentage. It tells you the unleveraged yield a property throws off — what you'd earn if you paid all cash. It's useful for comparing properties, but it ignores financing, appreciation, and tax effects, so don't treat it as your actual return.
◈ IN PRACTICE
Example
A duplex generates $36,000 of NOI per year and sells for $600,000. Cap rate = $36,000 / $600,000 = 6%. A similar duplex two blocks away with $36,000 NOI listed at $720,000 has a 5% cap rate — you're paying more for the same income.
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