What is this property really yielding?

What a cap rate tells you

The capitalization rate is the yield a property produces on its price with no loan in the picture: one year of net operating income, divided by what the property costs. A $1,000,000 building clearing $65,000 after operating costs runs at a 6.5% cap — meaning a buyer paying cash earns 6.5% on their money before financing, appreciation or tax effects enter. Because it strips financing out, the cap rate is the number two differently-leveraged buyers can agree on, and it is how income property is quoted, compared and priced: brokers market at a cap rate, appraisers reconcile to one, and lenders sanity-check the purchase against the caps recent sales imply. It also runs both directions — divide NOI by a market cap rate instead, and you have what the income says the building is worth.

How the number is computed

Cap rate = net operating income ÷ price × 100. The NOI is built the standard way: gross annual income, minus an allowance for vacancy and credit loss, minus the operating expenses — property taxes, insurance, management, repairs and maintenance, utilities the owner carries. Two costs stay out on purpose. Mortgage payments are excluded because the cap rate describes the property, not anyone's loan. Capital expenditures — a roof, an HVAC replacement — are excluded because they are investments in the asset rather than the annual cost of operating it. If you already know your NOI, enter it as the gross income and set vacancy and expenses to zero; the arithmetic is the same either way, and the calculator recomputes as you type.

What a good cap rate looks like

A cap rate prices risk, so "good" is local. Stabilized residential rentals in strong metros trade around 4–6%; secondary-market multifamily more like 6–8%; commercial property — offices, retail, industrial — typically higher still, with the rate rising as leases get shorter and tenants get riskier. Two comparisons matter more than any national average. First, recent sales of similar buildings nearby: a property priced two points above its comps is either a find or a warning. Second, your cost of debt: when the cap rate sits below the interest rate, the loan consumes more than the building yields — negative leverage — and the deal only works if income grows or the price was wrong.

Common mistakes

The classic error is computing it on gross rent — skipping vacancy and expenses roughly doubles the apparent yield and makes every listing look brilliant. Self-managing owners make a quieter version of the same mistake by leaving management out: the building still costs that labor, and a buyer will underwrite it at 8–10% of collected rent whether or not you pay yourself today. Watch which NOI a listing quotes — pro-forma numbers describe the property the seller hopes it becomes, not the one being sold, so recompute from actuals. And treat an unusually high cap rate as information rather than a bargain: the market prices the tenancy, the deferred maintenance and the location into that number before you arrive.

The cap rate is one property; a lender's next question is the whole portfolio. The free Schedule of Real Estate Owned generator builds that document — every property, income, debt and equity in the layout underwriters expect — the same way this page builds the rate.