Capitalization Rate
Capitalization rate, or cap rate, is NOI divided by property value and is used to estimate return and support multifamily valuation decisions.
Definition
Capitalization rate, or cap rate, is a real estate valuation metric calculated by dividing a property's net operating income (NOI) by its property value. It is commonly expressed as a percentage and used to estimate the return an income-producing property is expected to generate. In multifamily, cap rate helps connect day-to-day operating performance with asset value.
Example
A 200-unit apartment community generates $1,000,000 in annual NOI and is valued at $20,000,000. Its cap rate is 5% because `$1,000,000 ÷ $20,000,000 = 0.05`.
Why It Matters?
Cap rate matters because operations decisions that increase NOI—such as improving collections, controlling operating expenses, or reducing vacancy—can influence property valuation. It also gives leaders a common way to compare assets, evaluate investment returns, and understand how operating performance supports portfolio strategy.
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