Real Estate InvestingHomebuying Glossary
Cap Rate
Also known as Capitalization Rate
A percentage measuring a rental property's yearly income potential relative to its price.
In plain English
Cap rate is calculated by dividing a property's annual net operating income by its purchase price, giving investors a quick way to compare the income potential of different rental properties regardless of financing.
Why it matters
A higher cap rate generally signals higher potential return but often also higher risk. It's one data point among several, not the whole picture.
Related terms
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