How To Calculate Cap Rate In Real Estate
JB
Jeremiah Boucher Founder, Patriot Holdings • Author of Finding Your Edge
Key Takeaways
- Cap rate = NOI / Purchase Price — it tells you the unlevered return on the asset at the current income.
- A lower cap rate means higher price relative to income — compressed caps mean you're paying for growth or safety.
- Always verify the NOI used in the cap rate calculation — sellers inflate it by excluding reserves and management fees.
- Cap rates vary by asset class, market, and quality — compare within the same bucket, not across different property types.