Cap rate compares a property’s annual net operating income (NOI) with its purchase price or market value. It measures income before financing and helps compare income-producing properties. It is different from an investor’s total return on investment (ROI).
Cap rate formula
Cap rate = annual NOI ÷ purchase price or market value × 100. State which value and income period you are using. A cap rate based on an asking price is an asking cap rate, not evidence of a completed sale.
What goes into NOI?
Start with rental and other property income after vacancy and collection loss. Subtract operating expenses such as property taxes, insurance, management, repairs and owner-paid utilities. NOI excludes mortgage principal and interest payments, depreciation and the investor’s income taxes. Major capital work and reserves should be reviewed separately and their treatment stated in the analysis.
Identify whether the calculation uses trailing actual income, projected first-year income or stabilized income. Compare properties using consistent assumptions. A projection based on full occupancy can look very different from actual collections.
Example: calculating a 10% cap rate
Assume annual NOI of $100,000 and a purchase price of $1,000,000:
$100,000 ÷ $1,000,000 × 100 = 10%.
This hypothetical figure describes the relationship between operating income and price. It is not a 10% cash distribution to a financed buyer, a guaranteed return or a statement about current Hagerstown cap rates.
Cap rate, cash-on-cash return and ROI
- Cap rate: annual NOI divided by the property’s price or value. It excludes the buyer’s financing.
- Cash-on-cash return: annual pre-tax cash flow after debt service divided by the investor’s cash contribution, with capital spending and reserves treated consistently.
- ROI: total profit relative to investment cost over a stated period. A full-holding-period equity calculation can include cash distributions and net sale proceeds after costs and loan payoff.
The same property can have different cash-on-cash results for buyers using different loans, even when its cap rate is unchanged. See our cash-on-cash return versus ROI guide for worked examples.
Does a higher cap rate mean a better investment?
A higher cap rate means more stated NOI relative to price or value. It does not, by itself, establish that an investment is better. A higher figure may reflect greater vacancy risk, weaker tenants, shorter leases, deferred maintenance or other concerns. An overstated NOI can also inflate the advertised cap rate.
Review location, property condition, lease terms, tenant payment history, future capital needs and the reliability of the income figures. Compare similar properties and investigate the reasons for differences.
Using cap rate to estimate value
Direct capitalization rearranges the formula: indicated value = NOI ÷ cap rate expressed as a decimal. For example, $100,000 NOI divided by an assumed 8% cap rate gives $1,250,000. At an assumed 10%, the same NOI gives $1,000,000.
These rates are illustrative. Selecting a rate requires relevant market evidence and judgment about the property. A simple calculation does not replace an appraisal or a detailed review of the property’s valuation and condition.
Reviewing a Hagerstown investment property
Start with the rent roll, leases, operating statements, tax and insurance costs, repair history and expected capital work. Use those records to test the advertised NOI and compare the property with relevant local sales.
Use our multifamily investment calculator to explore income, expenses and financing, or discuss a property with Roberto Gonzalez.
Definition reference: Nareit: Capitalization Rate. Examples and explanation updated October 30, 2026.
