The capitalization rate, or cap rate, is the ratio of an income-producing property's annual net operating income (NOI) to its price or value.

The capitalization rate is expressed as a percentage.

The capitalization rate is the central input to the direct capitalization method within the income approach to appraisal.

In the direct capitalization method, value equals net operating income divided by the rate.

The capitalization rate functions as a market-pricing benchmark published in periodic industry surveys.

In theory, the capitalization rate can be decomposed into a discount rate less expected long-run income growth.

The term "capitalization rate" also appears in business and intangible-asset valuation with an analogous meaning of single-period income divided by value.

Capitalization rate Summary The capitalization CFA Institute +1 California State Board of Equalization CFA Institute Research and Policy Center CFA Institute CFA Institute Research and Policy Center California State Board of Equalization California State Board of Equalization California State Board of Equalization California State Board of Equalization California State Board of Equalization California State Board of Equalization California State Board of Equalization CFA Institute Research and Policy Center CFA Institute Research and Policy Center CFA Institute CFA Institute CFA Institute CFA Institute CFA Institute Freddie Mac Multifamily Federal Reserve Bank of San Francisco +1 CFA Institute Research and Policy Center CFA Institute source California BOE Lesson 8 Assessors' Handbook 502 Freddie Mac guidance CFA Institute Research and Policy Center source Federal Reserve Bank of San Francisco source

Capitalization rateSummaryThe capitalization rate, commonly known as the cap rate, is a fundamental real estate metric used to estimate the unlevered annual yield of an income-producing property.

It is calculated by dividing a property's net operating income (NOI) by its current market value or acquisition price.

Investors, lenders, and appraisers rely on cap rates as an initial screening tool to evaluate relative investment risk, compare assets, and determine market valuations.Key factsThe capitalization rate formula expresses net operating income as a percentage or ratio of a property's current market value or purchase price.

[source: Corporate Finance Institute, database, July 16, 2018, https://corporatefinanceinstitute.com/resources/valuation/capitalization-cap-rate/]Net operating income (NOI) is derived by subtracting annual operating expenses from total annual revenue, excluding mortgage debt service and income taxes.

[source: Yardi, database, May 19, 2026, https://www.yardi.com/blog/cap-rate-real-estate/]Capitalization rates measure unlevered returns, omitting the financial impact of loans, financing structures, or financial leverage.

[source: Yardi, database, May 19, 2026, https://www.yardi.com/blog/cap-rate-real-estate/]A higher cap rate typically signals a higher potential rate of return accompanied by greater perceived investment risk or lower asset quality.

[source: Corporate Finance Institute, database, July 16, 2018, https://corporatefinanceinstitute.com/resources/valuation/capitalization-cap-rate/]A lower cap rate typically indicates a lower risk profile, more stable cash flows, high market liquidity, and a higher property valuation relative to generated income.

[source: AEI Consultants, database, May 5, 2023, https://aeiconsultants.com/cap-rates-101-why-they-matter-in-cre-investments/]Real estate investors use cap rates as an initial screening tool to compare multiple properties across similar markets or asset classes.

[source: AEI Consultants, database, May 5, 2023, https://aeiconsultants.com/cap-rates-101-why-they-matter-in-cre-investments/]Property valuation can be calculated in reverse by dividing a property's projected first-year NOI by the prevailing market capitalization rate.

[source: Hopewell Township, database, undated, https://www.hopewelltwp.org/DocumentCenter/View/2517]Macroeconomic conditions, particularly shifting interest rates set by central banks and credit availability, directly influence market-wide cap rate trends and property asset values.

[source: Boston Appraisal Group, database, undated, https://bostonappraisal.com/capitalization-rates-real-in-estate-insights/]Geographic location and asset class heavily impact cap rates, with core properties in high-demand urban centers frequently trading at lower cap rates due to higher liquidity and stability.

[source: Corporate Finance Institute, database, July 16, 2018, https://corporatefinanceinstitute.com/resources/valuation/capitalization-cap-rate/]Cap rates represent a single-year snapshot and do not explicitly account for future income growth, capital expenditures, or long-term property appreciation.

[source: Yardi, database, May 19, 2026, https://www.yardi.com/blog/cap-rate-real-estate/]Contested pointsWhile economic theory and general market consensus link cap rates inversely to interest rates, market analysts note that empirical adjustments can lag, meaning cap rates do not always move immediately or one-for-one with shifts in benchmark interest rates [UNSOURCED].SourcesCorporate Finance Institute; database; July 16, 2018; https://corporatefinanceinstitute.com/resources/valuation/capitalization-cap-rate/Yardi; database; May 19, 2026; https://www.yardi.com/blog/cap-rate-real-estate/AEI Consultants; database; May 5, 2023; https://aeiconsultants.com/cap-rates-101-why-they-matter-in-cre-investments/Hopewell Township; database; undated; https://www.hopewelltwp.org/DocumentCenter/View/2517Boston Appraisal Group; database; undated; https://bostonappraisal.com/capitalization-rates-real-in-estate-insights/