A capitalization rate, or cap rate, is a metric used to estimate and compare the rates of return on multiple commercial or residential real estate properties. It is calculated by dividing a propertys net operating income (NOI) by its current market value. The resulting ratio, expressed as a percentage, is an estimation of an investors potential return on a real estate investment. Cap rates are measures used to estimate and compare the rates of return on multiple commercial or residential real estate properties. They are typically used by real estate investors to compare the risk involved in buying multiple commercial properties.

It is important to note that cap rates should not be used as the sole indicator of an investments strength because they do not take into account leverage, the time value of money, and future cash flows from property improvements, among other factors. While cap rates can be useful for quickly comparing the relative value of similar real estate investments in the market, they are subject to high variance since they are based on projected estimates of future income.

There is no official definition of a good or bad cap rate in real estate because several factors can impact one propertys cap rate compared to another. However, in general, the higher the cap rate, the greater the risk and return. Market analysts say an ideal cap rate is between five and 10 percent, but the exact number will depend on the property type and location.

In summary, a cap rate is a metric used to estimate and compare the rates of return on multiple commercial or residential real estate properties. It is calculated by dividing a propertys net operating income by its current market value. Cap rates should not be used as the sole indicator of an investments strength, and there is no official definition of a good or bad cap rate in real estate. However, in general, the higher the cap rate, the greater the risk and return.