Cap Rate (Capitalization Rate)

The capitalization rate is net operating income divided by purchase price or value. A building producing $700K of NOI valued at $10M trades at a 7% cap rate. It is the market’s shorthand for pricing income property: lower cap rates mean investors are paying more per dollar of income (typical of high-demand assets and markets), higher cap rates mean cheaper pricing and usually more perceived risk.

Cap rates matter to borrowers because value — and therefore LTV and loan proceeds — is downstream of them. If cap rates move from 5.5% to 7% while your NOI is flat, your value has fallen roughly 20%, and the loan a lender will write against it falls with it. This mechanical link between rates and value is a large part of why loans maturing in a higher-rate environment face refinancing gaps even when the property itself never missed a beat.

We don’t publish cap-rate opinions — they are appraisal judgments, not observations — but cap-rate math sits underneath the LTV and DSCR terms lenders quote us, and underneath the appraisal every refinance in our recorded-loan data had to clear.