The Cap Rate, or Capitalization Rate, is a common measurement tool used by real estate professionals to measure the attractiveness of a property.
Cap Rate measures the Net Operating Income (NOI) as a percent of the Sales Price. It excludes the expense for debt service (mortgage interest), and provides a straighforward view on the return on investment (ROI) that can be used to compare different properties. The higher the Cap Rate the better.
The highest quality properties in hot markets may have cap rates of as low as 3% or 4% or lower. Good investment property is more often in the 6% to 8% range.