Capitalisation Rate (Cap Rate)
NOI as a percentage of property value, measuring investment yield
What is Capitalisation Rate (Cap Rate)?
Capitalisation rate is the annual net income from a property as a percentage of its market value. It shows the yield an investor would earn if they bought the property outright.
It is widely used to compare investment properties and gauge risk and value in the market.
How this KPI is measured
- Function
- Operations & Supply Chain
- Sub-function
- Property Management
- Industry
- Real Estate
- Type
- Lagging
- Impact
- Financial control
- Unit
- %
- Measurement frequency
- Annual
- Formula
- (Net Operating Income / Property market value) × 100
How to calculate it
Divide net operating income by the property's market value, and multiply by 100.
For example, a property earning 90,000 in net operating income and valued at 1,500,000 has a cap rate of 6%.
Higher rates suggest higher yield and often higher risk, and lower rates suggest lower yield and often lower risk. Compare with similar properties in the same market.
Where it is used
Comparing investments
Weigh yields.
Valuing property
Estimate value from income.
Tracking market conditions
See pricing trends.
How to improve it
Tips and common mistakes
- Cap rate ignores financing and future growth.
- Accurate expenses matter greatly.
- Use with other measures such as cash returns.
More Operations & Supply Chain kpi library
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