What Is a Cap Rate? How to Calculate Cap Rate for Multifamily Properties

What Is a Cap Rate?

A capitalization rate (cap rate) is the ratio of a property's net operating income (NOI) to its purchase price or current market value. It is expressed as a percentage and represents the annual return an investor would receive if they purchased the property with all cash and no financing. The cap rate is the most widely used metric for valuing and comparing commercial real estate properties, particularly multifamily apartment buildings.

The formula is: Cap Rate = Net Operating Income / Property Value x 100

For example, a property generating $300,000 in annual NOI with a market value of $5,000,000 has a cap rate of 6.0%. This means an all-cash buyer would earn a 6% annual return on their investment from operations alone, before any appreciation or tax benefits.

How to Calculate Cap Rate

Step 1: Determine Net Operating Income (NOI)

NOI = Effective Gross Income - Operating Expenses

Include all rental income, other income (parking, laundry, pet rent), and subtract all operating expenses (property taxes, insurance, maintenance, management, utilities). Do not subtract debt service — NOI is calculated before financing.

Step 2: Divide by Property Value

Use either the purchase price (for acquisition analysis) or the appraised/estimated market value (for current portfolio valuation).

Example Calculation

What Is a Good Cap Rate for Multifamily?

Cap rates vary by location, property class, age, condition, and economic cycle. Here are approximate ranges as of early 2026:

Lower cap rates indicate higher property values relative to income (often in stronger, more stable markets). Higher cap rates indicate lower relative values but potentially higher current yields (often in riskier markets or property conditions).

Cap Rate vs. Other Return Metrics

Cap rate is useful for comparing properties on an apples-to-apples basis because it removes financing differences. Two identical properties with the same NOI have the same cap rate regardless of how they're financed.

How Cap Rates Affect Property Value

Since property value is calculated by dividing NOI by cap rate, small changes in cap rate have large impacts on value:

This is why cap rate compression (rates going down) creates massive appreciation, and cap rate expansion (rates going up) destroys value — even if NOI stays constant.