Capitalization rate (“cap rate”) measures a property’s return independent of how it’s financed. You divide its annual net operating income (NOI) by its purchase price or current value: a $500,000 building producing $30,000 of NOI has a 6% cap rate. Because it ignores your mortgage, cap rate lets you compare very different properties on equal footing.
A lower cap rate generally signals a pricier, lower-risk market; a higher one signals a cheaper or riskier one. It’s a snapshot, not a forecast — it says nothing about financing, appreciation, or where rents are headed. Read it alongside cash-on-cash return and, above all, only trust it if the NOI behind it comes from clean books.