Cap Rate (Capitalization Rate)
A property’s net operating income divided by its price or market value, expressed as a percentage. Cap rate measures the unlevered annual return of an income property, which makes it useful for comparing deals independent of how they are financed. Typical cap rates vary widely by market and property type.
Related terms
NOI (Net Operating Income)
A property’s income minus its operating expenses, calculated before loan payments, income taxes, and capital expenditures. NOI isolates how the property itself performs, independent of how it is financed or owned. It is the numerator in cap rate and DSCR, which makes it the backbone of most income-property analysis.
Gross Rent Multiplier
A property’s price divided by its gross annual rental income. GRM is a quick first-pass screen — a lower multiple means the price is smaller relative to the rent it produces. Because it ignores expenses entirely, it is cruder than cap rate and best used only to shortlist properties for real analysis.
Cash-on-Cash Return
Annual pre-tax cash flow divided by the total cash actually invested — down payment, closing costs, and upfront repairs — expressed as a percentage. Unlike cap rate, cash-on-cash accounts for financing, so it shows what the investor’s own money is earning. Two identical properties can have very different cash-on-cash returns depending on the loan.