Capitalization Rate (Cap Rate)
The cap rate for a property is determined by dividing the property's net operating income by its purchase price, and is used as a return-and-risk indicator in real estate investing. Industry glossaries note that higher cap rates generally indicate higher returns and greater perceived risk.
- Where it applies
- Generally, not specific to New York
- When it comes up
- Valuation; acquisition underwriting; market comps
- Property types
- Income-producing real estate
In practice
Operators should specify whether NOI is in-place, forward, or stabilized; cap rates derived from mismatched NOI definitions are not comparable.
Read more in the Knowledge Base
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Related terms
Valuation and Appraisal
- Appraisal Standards of Professional Practice
- Direct Capitalization
- Discounted Cash Flow (DCF) Analysis
- Income Approach
- Present Value (PV)
- Sales Comparison Approach
- Uniform Standards of Professional Appraisal Practice (USPAP)
General information, not legal, tax or financial advice.