what is a cap rate on rental property

[HaydenDella]

Cap rate, or capitalization rate, is a metric used to estimate a rental property's potential return on investment. It is calculated by dividing the property's annual net operating income (NOI) by its current market value. Cap rates are expressed as a percentage and are useful for investors to compare the potential profitability of different properties, especially commercial ones. A higher cap rate generally suggests a higher risk but a potentially higher return, while a lower cap rate indicates a lower risk but a lower return.