DealBeast Logo
DealBeast

Paste an address. Get ARV, MAO, and ask vs MAO in one screen. Start free, upgrade when you are closing deals.

Start free on DealBeast
Real Estate Glossary

Capitalization Rate (Cap Rate)

Quick Answer

Cap rate, short for capitalization rate, compares a property's annual net operating income with its price or current value. It is a quick way for hold investors to compare unlevered property performance. Cap rate does not include the mortgage. It also does not make a wholesale deal work when the ask is above the buyer's MAO.

What is Capitalization Rate?

Cap rate, short for capitalization rate, compares a property's annual net operating income with its price or current value. It is a quick way for hold investors to compare unlevered property performance. Cap rate does not include the mortgage. It also does not make a wholesale deal work when the ask is above the buyer's MAO.

Cap Rate Formula

Cap rate = annual NOI / purchase price or market value

Frequently Asked Questions

Does cap rate include the mortgage?+
No. Cap rate uses NOI before debt service. Use DSCR and cash flow to show what happens after the loan payment.
Is a higher cap rate always better?+
No. A high cap rate can reflect weaker rent demand, more repairs, higher vacancy, or a riskier location. Check the NOI inputs and property condition.
Should wholesalers lead with cap rate?+
No. Lead with ask vs MAO, ARV, and repairs. Use cap rate after the price clears when a hold buyer wants rental analysis.
What price belongs in the cap rate formula?+
Use the price you are analyzing and label it. That may be the contract price, buyer's purchase price, or current market value. Keep repairs and closing costs visible in the rest of the underwriting.

Related Terms

NoiDscr