Capitalization Rate

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.

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`.

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.