Back to all Glossary Terms

Cap Rate

The capitalization, or “cap”, rate is used in commercial real estate to indicate the rate of return that is expected to be generated on a real estate investment property. The calculation is based on the Net Operating Income the property generates divided by the Purchase Price. Lower cap rates (3-5%) generally point to safer / less risky investments and are most commonly found in primary cities (L.A., New York, Chicago) with stabilized, trophy assets. Higher cap rate deals are typically higher on the risk profile and are more likely to be in secondary or tertiary markets.