Capitalization Rate: Formula, Meaning, and REIT Valuation

A capitalization rate, or cap rate, relates a property's Net Operating Income to its value or purchase price.

Capitalization rate = Annual NOI ÷ Property value

If a property produces $8 million of annual NOI and is valued at $100 million, its cap rate is 8%.

Cap rate is one of the most common real-estate valuation shorthand measures, but the numerator and valuation date matter.

Forward versus trailing cap rate

A cap rate can use:

• trailing NOI, based on a recent historical period; or
• forward NOI, based on expected next-period income.

Nareit notes that forward NOI is common in acquisition pricing. A forward cap rate embeds assumptions about rents, occupancy, expenses, and stabilization, so it is partly forecast-based.

Do not compare a trailing cap rate with a forward cap rate as though they were identical measures.

Cap rate and value move inversely

Holding NOI constant:

Property value = NOI ÷ Cap rate

For $8 million of NOI:

• at an 8% cap rate, implied value is $100 million;
• at a 6% cap rate, implied value is about $133 million; and
• at a 10% cap rate, implied value is $80 million.

A lower cap rate can reflect lower perceived risk, stronger expected growth, lower market interest rates, better property quality, or more aggressive pricing. A higher cap rate can reflect the opposite.

Cap rate is not an expected total return

Cap rate does not include leverage, debt cost, future rent growth, capital expenditures, changes in occupancy, property appreciation, transaction costs, or the timing of cash flows.

An 8% cap rate does not mean an investor should expect an 8% total return.

REIT implied cap rates

Analysts sometimes estimate an implied cap rate for a public REIT by comparing portfolio NOI with an estimate of enterprise or gross asset value. This introduces additional assumptions about corporate overhead, non-property assets, debt, joint ventures, and the appropriate NOI period.

An implied public-market cap rate is therefore not automatically comparable with a transaction cap rate on one stabilized property.

Comparison checklist

Before comparing cap rates, identify:

• trailing versus forward NOI;
• cash versus GAAP rent assumptions;
• stabilized versus in-place occupancy;
• property type and geography;
• capital expenditure needs;
• lease duration and tenant credit; and
• transaction versus public-market valuation basis.

Sources

• Nareit Capitalization Rate definition
• Realty Income Q4 2025 supplemental data

Explore more topics in the Financial Research Encyclopedia.