Cap rate explained, and what it does not tell you
How to calculate a cap rate, why two properties with the same number can be very different investments, and where sellers inflate it.
The capitalization rate is net operating income divided by price. If a property produces $80,000 of net operating income and sells for $1,000,000, the cap rate is 8%.
Net operating income, done honestly
NOI is income after operating expenses and before debt payments. The most common problem is not the math, it is the inputs: projected rents presented as actual, missing vacancy, no management fee because the owner self-manages, or last year’s insurance premium in a year when premiums went up.
What cap rate does not tell you
- Your return with financing. That is cash-on-cash.
- The condition of the roof, systems, and deferred maintenance.
- Whether rents are below market (upside) or above market (risk).
- How easy the property will be to sell later.
The best investment isn’t always the highest return. It’s the one that fits your plan.
Your next step
Apply this to your own situation in a few short questions, with guidance before you share any contact details.
Run the cap rate calculatorPrefer to talk it through?
When your situation needs professional judgment, Stoic Estates can help directly.
This takes you from Stoic IQ education to Stoic Estates services.
This content is educational and is not financial, investment, tax, or legal advice. Calculations are estimates based on your inputs and are not guarantees.