Cap Rate
Real estateGlossary term
Definition
Capitalization rate measures a rental property's potential return, calculated by dividing net operating income by the property's market value. A property generating $12,000 annually valued at $200,000 has a 6% cap rate. Used to compare investment properties.
Related terms
- Cash-on-Cash ReturnA measure of annual pre-tax cash flow relative to the total cash invested in a property. Unlike cap rate, it accounts for financing. If you invest $50,000 and receive $5,000 in annual cash flow, the cash-on-cash return is 10%.
- Rental IncomeMoney received from tenants for the use of real estate property. Rental income is considered taxable but can be offset by deductions including mortgage interest, property taxes, insurance, maintenance, and depreciation.
- Fair Market ValueThe price a property would sell for on the open market between a willing buyer and seller, both having reasonable knowledge of relevant facts. Determined by comparable sales, appraisals, and market conditions. Used for tax assessments and insurance claims.
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