An investor divides a property’s net operating income by its current market value and gets 0.06, or 6 percent. That figure is the capitalization rate, or cap rate. It offers a quick snapshot of expected return if the property were purchased in cash.

Higher cap rates generally indicate higher risk or lower demand; lower cap rates appear in stable, sought-after locations. Cap rates vary by property type, market, and economic conditions. They do not account for financing, so leveraged returns can differ substantially.

Appraisers and investors use cap rates to compare opportunities and to convert income into value. A small change in the assumed cap rate produces a large swing in indicated value. Cap rates are tools, not guarantees; actual performance depends on occupancy, expenses, and future market shifts.

In a single number, the cap rate compresses a great deal of market judgment.