Cap rate

A cap rate is the assumed rate of return on an investment in real estate.

To determine the value of a particular real estate asset, divide the net income or the net cash flow on the asset by the assumed cap rate. Effectively, this values the real estate as a perpetuity.

An alternative use of the concept is to take the net income or net cash flows, and divide it by the purchase price in a sales transaction, to determine the implied cap rate. Used in this fashion, the cap rate indicates rising or falling demand for real estate investments.