By David Parks · eXp Realty · The Apollo Group · 2 min read
A capitalization rate, or cap rate, is a property’s annual net operating income divided by its price. It helps investors compare properties without considering financing.
Cap rate equals net operating income (NOI) divided by purchase price. NOI is rental income minus operating expenses like taxes, insurance, maintenance, and management, but not mortgage payments.
A property earning $24,000 a year in NOI that costs $400,000 has a 6 percent cap rate. This is a simple illustration only.
A higher cap rate suggests more income relative to price, but may come with more risk. A lower cap rate may mean a more stable area or higher expected appreciation.
Cap rate ignores financing, taxes, and future changes in rent or expenses. It depends on accurate numbers, so verify rents and costs.
Compare similar property types in similar areas. Combine cap rate with other measures, like cash-on-cash return, and talk with a lender and tax professional about your own situation.
This article is general information, not legal, tax, financial or inspection advice. Every home and situation is different, so confirm details with a licensed inspector, lender, attorney or tax professional.
David is a Greater Denver real estate advisor with eXp Realty and The Apollo Group (Colorado broker license FA100103211). He has closed more than $55 million in volume, earned eXp Icon status in 2025, and holds a 5.0 rating on Zillow from 27 verified reviews.
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