Cap Rate
Cap Rate (Capitalization Rate)
Cap Rate is a real estate metric used to measure the return on an investment property based on its income.
Cap Rate Formula
Cap Rate = (Net Operating Income ÷ Property Value) × 100
Example
- Net income: €20,000
- Property value: €250,000
Cap Rate = (20,000 ÷ 250,000) × 100 = 8%
What Cap Rate Means
- Higher cap rate → higher return, higher risk
- Lower cap rate → lower return, lower risk
Typical Cap Rate Ranges
- 3%–5% → Low risk, stable markets
- 5%–8% → Balanced investment
- 8%+ → Higher risk, higher return
Key Insight
Cap rate helps compare investment properties regardless of financing.