How to Read a Cap Rate Without Getting Fooled

Capitalization rate is a property's net operating income (NOI) divided by its price. A $500,000 building with $35,000 in NOI is a 7% cap. Simple — which is exactly why it gets stretched.

Where the numbers get padded

Watch for listings that use projected or 'market' rents instead of actual leases, that leave out vacancy, or that skip management, repairs, and capital reserves. Ask for the rent roll and twelve months of actual expenses, then rebuild NOI yourself.

Taxes reset when you buy

In Maine, property taxes can change after a sale or revaluation. Use the current tax bill — and ask the town assessor about upcoming revaluations — rather than the seller's old number.

Cap rate isn't cash flow

Cap rate ignores your mortgage. A solid cap rate can still lose money each month at today's interest rates. Run the deal through the cash flow calculator on our homepage before you fall in love with it.