Answers · Cap rate / yield
What is a cap rate (or yield) in property, in plain English?
Direct answer
A cap rate (capitalisation rate, or yield) is a property's annual net income expressed as a percentage of its value. A building earning $500,000 net a year and worth $10 million has a 5% cap rate. It's the basic measure of a property's return — and, in reverse, how it's priced.
Cap rates work two ways. If you know the income and the value, you get the yield. If you know the income and the market yield, you can estimate value — divide the net income by the cap rate. A lower cap rate means a higher price for the same income (and usually a more sought-after asset); a higher cap rate means a cheaper price and typically more perceived risk.
For a business owner, the cap rate is a useful reality check on owning. The yield your building earns as property is roughly its cap rate — and if your business earns materially more than that on capital it puts to work, the building is your lowest-returning asset. That gap is the heart of the buy-versus-lease question. This is general information, not investment advice.
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