Cap Rate (Capitalization Rate)

Cap rate (capitalization rate) is calculated by dividing a property's annual net operating income (NOI) by its purchase price. For example, a property generating $30,000 NOI purchased for $300,000 has a 10% cap rate. In short-term rentals, cap rates are typically higher than long-term rentals due to higher gross revenue, though expenses are also higher. Cap rate is used to compare investment opportunities and assess risk — higher cap rates indicate higher returns but often higher risk.