WHAT IS A CAP RATE?

The capitalization rate (cap rate) is a quick way for investors to measure the potential return of an income-generating property. It is expressed as a percentage and helps compare different properties to see the potentially better investment.

The cap rate is calculated by dividing a property’s net operating income (NOI) by the current market value or purchase price. [1]

WHAT DOES A CAP RATE TELL YOU?

Cap rates give investors an idea of return potential. A higher cap rate suggests higher potential returns but may also indicate higher risk. A lower cap rate usually means lower risk but also lower potential returns. Said another way, cap rates can be a valuable way to gauge risk—higher cap rates can indicate more uncertainty, while lower cap rates generally suggest a more stable property. 

Investors also use cap rates to compare similar properties and determine which has better income potential relative to its price. [1]

HOW TO CALCULATE THE CAP RATE

To calculate the cap rate, follow these steps: 

1. Find the gross income, which is all rental income and any additional income. 
2. Subtract operating expenses like property taxes, insurance, maintenance, property management, and utilities—basically, any cost it takes to own and operate the property. Important note: Do not include mortgage payments or depreciation.
3. Calculate NOI, which is the gross income minus expenses. 
4. Divide NOI by property value or purchase price. 
5. Convert the result to a percentage. [1]

CAP RATE EXAMPLE

If an investor purchases a multifamily property for $10 million and it generates $1 million in NOI per year, the cap rate is: 

$1,000,000 (NOI) / $10,000,000 (purchase price) = 0.1 or 10%.

This example illustrates that, based on the given NOI and purchase price, the property has a capitalization rate of 10%. It’s important to remember that this calculation doesn’t account for factors like financing, appreciation, or potential changes in income and expenses over time. [1]

COMBINING CAP RATES WITH OTHER METRICS

Although practical and widely used, cap rates don’t tell the whole story. They don’t factor in financing costs or appreciation, nor tell you the full return on investment (ROI). Investors also look at cash-on-cash return, IRR, and equity multiple to better understand an investment’s suitability. While a higher cap rate might suggest a strong return, it tells you nothing about the property’s location, growth potential, and overall investment strategy. [1]

CONNECT WITH AN INSTITUTIONAL REAL ESTATE OWNER/OPERATOR 

BAM Capital partners with accredited investors who want to enjoy passive income and all the other benefits of multifamily private placement. As the private equity arm of The BAM Companies, BAM Capital has been focusing on buying the most profitable assets and staying disciplined in its investment thesis. BAM Capital’s investment strategy aims to create forced appreciation while mitigating investor risk. To date, the brand has successfully managed over $1.7 billion in assets across ~9,000 apartment units. [2]

Remember that no investment is risk-free. Before making financial decisions, consult your investment advisor and schedule a call with a BAM Capital investment team member.

Disclaimer: All investments carry risk, including potential loss of capital. This content is for informational purposes only and is not financial, legal, or investment advice, nor an offer or solicitation to buy or sell any security. Consult an independent advisor for personalized guidance and contact BAM Capital for details on current offerings. BAM Capital and its representatives are not fiduciaries or investment advisors. The information provided is general and may not reflect individual financial goals. Any financial terms, projections, or forward-looking statements contained herein are hypothetical in nature and should not be interpreted as guarantees of future performance or safety. Such statements reflect Bam Capital’s opinion and are subject to market fluctuations, economic conditions, and investment risks. Past performance does not predict future results. BAM Capital and its affiliates do not guarantee the accuracy or completeness of this information. Bam Capital offers investment opportunities under Rule 506(c) of Regulation D exclusively for accredited investors as defined by the SEC. Verification of accredited investor status is required prior to participating in any investment.

© 2025 Bam Capital. All rights reserved.

SOURCES:

[1]: OMNI Calculator. (2024). “Cap Rate Calculator.” https://www.omnicalculator.com/finance/cap-rate?utm_source=best-ever-conference&utm_medium=best-ever-conference-2024&utm_content=best-ever-conference-23-landing-page&utm_campaign=best-ever-conference-23-landing-page&gclid=CjwKCAjw67ajBhAVEiwA2g_jEEBddXFRAAireDjjIjEN4cm1mthxpegaHntWBzQRQTR4hHH3IUOFCxoCbA8QAvD_BwE

[2]: BAM Capital. (n.d.). “Current Portfolio.” https://capital.thebamcompanies.com