CAP rate

The capitalization rate, or CAP rate, is a metric used in real estate to estimate the potential return on an investment property. It’s calculated by dividing the property’s annual net income (income after expenses) by its current market value or purchase price. For example, if a property costs $1 million and generates $100,000 in annual net income, the CAP rate is 10%. A higher CAP rate suggests a higher potential return, often indicating a riskier investment, while a lower CAP rate implies a safer, but possibly less profitable, investment. It helps investors compare different properties’ profitability.