What is Capitalisation Rate (Cap Rate)?

The capitalisation rate is the ratio of a property's net operating income to its current market value, used to compare the unlevered yield of investment properties and to convert income into value.

Cap rate excludes financing — it tells you what an all-cash buyer would earn on the property. It is the inverse of an income multiple: a 5% cap rate equals a 20× income multiple.

Cap rates compress as quality and certainty rise. Trophy assets in prime markets trade at 3–4% cap rates; secondary office or industrial at 6–8%; distressed assets above 10%. The spread over the risk-free rate is the property risk premium.

Formula

Cap Rate = Net Operating Income ÷ Property Value

Example

An office building generates CHF 500k net operating income and is valued at CHF 10m — a 5% cap rate. If similar properties trade at 4%, the implied value is CHF 12.5m.

Related terms

Rental Yield

Rental yield is the annual rental income from an investment property expressed as a percentage of the property's value, used to compare the income performance of different real-estate investments.

Property Value

Property value is the estimated worth of a piece of real estate, determined by appraisal, comparable sales or income approach, and used for sale pricing, mortgage underwriting, taxation and insurance.

Property Management

Property management is the operation, control and oversight of real estate on behalf of the owner — covering tenant relations, rent collection, maintenance, repairs and regulatory compliance, usually performed by a professional firm for a fee.

Freehold

Freehold is the most absolute form of property ownership, granting the holder unlimited time of possession of the land and any buildings on it, subject only to statutory obligations such as zoning, taxes and easements.

Frequently asked questions

How is cap rate different from yield?+

Cap rate is strictly NOI ÷ value; yield often refers to gross rent ÷ price. Cap rate is the institutional convention.

Why are cap rates lower in prime locations?+

Buyers accept lower current yield in exchange for lower risk and stronger appreciation prospects.

Should I use cap rate or IRR?+

Cap rate for a quick comparison snapshot; IRR for a full multi-year view including sale proceeds.