Capitalization Rate (Cap Rate) (Cap Rate)
Direct definition
A property valuation metric equal to net operating income divided by property value, shown as a percentage.
Written by the Vabasso Mortgage Editorial Team · Reviewed against agency and federal sources · Read our editorial policy for how we research and review mortgage content
Plain-English explanation
Cap rate expresses an unlevered yield: what an investor would earn per year if they bought the property in cash. Higher cap rates suggest higher return and, often, higher risk.
Why it matters
It's a fast way to compare income properties on an apples-to-apples basis before financing.
Where you may see it
- Investment property analysis
- Appraisal report
- Loan program guidelines
A real-world example
Educational and illustrative only
A common misunderstanding
Cap rate doesn't account for financing costs — it reflects an unlevered return as if the property were purchased entirely in cash.
Frequently asked
What is a good cap rate?+
It depends on the market and asset class — investors compare a subject property's cap rate to local averages.
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- Author
- Vabasso Mortgage Editorial Team
- Reviewed by
- Vabasso Mortgage Licensed Advisory Team
- Last reviewed
- July 30, 2026