Cap Rate Is an Unlevered Property Measure
Capitalization rate divides annual net operating income by property value. Net operating income reflects property operations before financing, so mortgage principal and interest are not part of the cap-rate numerator.
A higher or lower cap rate is not universally better. Property type, location, lease quality, expected growth, required capital spending and market risk all affect how investors interpret the ratio.
Cap rate deliberately ignores financing so different properties can be compared on the income produced by the property itself. That is useful, but it also means cap rate is not your personal leveraged return. A property with a lower cap rate may still be attractive because of location, lease quality or expected growth, while a high cap rate may reflect risk or unusually optimistic income assumptions. Check how NOI was built before comparing the percentage across listings.
Frequently Asked Questions
Why is mortgage payment excluded from cap rate?
Cap rate is intended to compare the property's operating income with its value independently of a particular owner's financing structure.
Can NOI be negative?
Yes. If modeled operating expenses exceed operating income, NOI and the resulting cap-rate scenario can be negative.
Why can two properties with the same cap rate still be very different investments?
Cap rate does not show financing, tenant quality, lease duration, future capital expenditure, location or growth expectations. Those differences can matter even when current NOI relative to price is identical.
Methodology & Related Tools
Review how RatioCalc builds, tests and updates calculator models before using an estimate for a material decision.
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