Capitalization Rates

Capitalization rates connect an income property’s net operating income (NOI) with value. The basic relationship is simple, but the rate’s meaning changes with the income period, valuation date, and purpose of the analysis. Appraisers may call the rate applied to total-property NOI the overall capitalization rate, or OAR.

Use Capitalization Rate (Cap Rate) for the general concept, OAR terminology, and holding-period calculations based on current NOI and value. Use Going-In Cap Rate for acquisition pricing and Terminal Capitalization Rate for exit value in a DCF model.

Choose the Right Rate

What to Verify

• Whether NOI is trailing, annualized, forward, or stabilized.
• Whether reserves, vacancy, management fees, and nonrecoverable expenses are treated consistently.
• Whether the denominator is purchase price, current market value, or modeled terminal value.
• Whether comparable transactions use the same property type, location, lease profile, and income convention.
• Whether capital expenditures, selling costs, and lease events are analyzed outside the headline cap-rate calculation.

Capitalization rates are educational valuation measures, not appraisals or recommendations. A rate should be interpreted with the underlying rent roll, expenses, property condition, market evidence, and financing context.

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