Cap rate
Yearly net operating income divided by property price, shown as a percentage. A property that clears $12,000 NOI and costs $200,000 has a 6% cap rate. Investors use it to compare properties in the same market.
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See how it worksWhere this comes up: on the market
Part 1 of 4
Why a seller cares
Cap rate is how an investor buying your rental turns its income into a price. If the market cap rate is 6% and your net income is $12,000, their number is $200,000, whatever the house next door sold for.
Part 2 of 4
A simple example
Your duplex nets $14,400 a year after expenses. Investors in your market buy at about a 7% cap rate.
| The arithmetic | The number |
|---|---|
| Net operating income | $14,400 |
| Divided by a 7% cap rate | About $206,000 |
| Divided by a 6% cap rate, in a hotter market | $240,000 |
Cap rate turns income into price. Raising the income raises the price; a lower cap rate does too.
Part 3 of 4
What people get wrong
That a higher cap rate means a better property. It means a cheaper one for the income, which usually means more risk.
Part 4 of 4 · where to read next
Where it appears in the sale
What a definition is, and what it isn't
Keighbor is a software company, not a law firm, brokerage, or tax adviser. This is general information, not legal, tax, financial, or real estate advice about your sale. Your situation may differ. Before acting on a contract, disclosure, title, tax, or pricing question, ask an appropriately licensed professional in your state.
Written and researched by Keighbor Research · drawn from the reference glossary · how we research and check what we publish
In your Room, this word explains itself where it appears.
Your Room defines cap rate in the step you meet it in, beside the document or the date it belongs to. Free to set up, with an agent or on your own.
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