Cap rate
Asset-Backed Securities glossary · Collateral & Cash Flow Modeling
Definition
The discount rate applied to NOI to value commercial real estate.
Cap rate in plain English
A 'cap rate' is a quick way to price a commercial building from the yearly profit it throws off. You take the building's net operating income (NOI) — the rent left after running costs but before loan payments — and divide by the price, so a building earning $100,000 a year that sells for $1,000,000 has a 10% cap rate. A higher cap rate means a cheaper price for each dollar of income (usually because buyers see more risk), and a lower one means investors are paying up for a safer, steadier property — like judging a lemonade stand by how many years of profit it takes to earn back what you paid.
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