The ‘Cap Rate’ (short for Capitalization Rate) is a metric used by real estate investors to show the rate of return a given property is expected to earn. This value is generated based off the net income a property generates. To calculate the cap rate of a given property, we use the following formula:

Capitalization Rate = Net Operating Income / Current Market Value

For example, if a property generates $70,000 per year, and the property is valued at $1M, you formula would be:

$70,000/$1,000,000 = 7% cap rate

Cap Rate varies greatly, depending on where you’re located geographically. But typically speaking, these are good numbers to shoot for:

Less than 4% (Poor/Minimum)

4% – 8% (Good/Average)

8% or higher (Excellent)

Also see: Why do my cap rates look off?