A capitalization rate ("cap rate") is a property’s net operating income divided by its price or value, shown as a percent. It estimates the unleveraged annual yield of buying in cash — a $1,000,000 property earning $60,000 of NOI has a 6% cap rate.
Because net operating income excludes financing, the cap rate lets investors compare deals independent of how each is funded. A lower cap rate generally means a more expensive property relative to its income (often a stronger market); a higher cap rate means a cheaper price relative to income, frequently with more perceived risk.
No. Cap rate is based on net operating income, which is calculated before debt service, so it is independent of financing.
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