Capitalisation Rate (Cap Rate)
Returns & Analysis
The ratio of a property's net operating income to its market value, used to estimate return on investment.
Full Explanation
The capitalisation rate (cap rate) is calculated as Net Operating Income ÷ Property Value × 100. It represents the expected rate of return on a property if purchased outright without financing. Cap rates are commonly used in commercial property valuation but can also help compare residential investments. A higher cap rate suggests higher returns but often comes with higher risk (regional areas, older properties). Lower cap rates indicate premium locations where capital growth is the primary driver.
Example
A property worth $500,000 with $25,000 net annual income (after expenses, before mortgage) has a cap rate of 5%.
Frequently Asked Questions
What is a good cap rate in Australia?
Residential cap rates in Australian capital cities typically range from 3-5%. Regional areas may offer 6-8%+. Commercial properties generally have higher cap rates (5-10%) reflecting higher risk and less liquidity.