Cap Rate (Capitalization Rate)
A rate used to estimate the value of income-producing properties, calculated by dividing NOI by the property's market value or purchase price. A property with $500,000 NOI and a 5% cap rate would be valued at $10 million. Lower cap rates indicate higher values and are typical in primary markets; higher cap rates suggest higher risk or secondary/tertiary markets.
Related Terms
NOI (Net Operating Income)
A property's annual income after deducting operating expenses but before debt service, capital expenditures, and income taxes. NOI is calculated as Effective Gross Income minus Operating Expenses. It is the fundamental metric used to value commercial real estate and determine borrowing capacity.
IRR (Internal Rate of Return)
A metric used to evaluate the profitability of an investment over its entire holding period, accounting for the time value of money. IRR represents the discount rate at which the net present value of all cash flows equals zero. Investors typically target IRRs of 15-25% depending on risk profile and investment strategy.
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