Capitalization rate is annual net operating income divided by property value or purchase price. It is useful only when the rent, vacancy, and operating-expense definitions are consistent across the properties being compared.
Decision points
- 01
Use NOI, not gross rent.
- 02
Exclude mortgage payments from the cap-rate numerator.
- 03
Compare the same expense and vacancy treatment across candidates.
Reconstruct NOI
Use effective rental income after vacancy, then subtract recurring operating expenses such as property tax, strata costs, insurance, maintenance, management, owner-paid utilities, and other ongoing items. Document every exclusion.
Read the ratio beside the property
A higher cap rate can reflect stronger income, a lower price, greater risk, weaker condition, inferior location, difficult tenancy facts, or deferred capital work. The ratio does not explain the cause.
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