Cap Rate Explained: What It Tells You (And What It Doesn't)

Cap rate measures unleveraged annual yield: NOI divided by property value. Because it ignores debt, it strips out financing decisions and isolates the property's intrinsic performance.

That makes cap rate excellent for comparing deals, and weak for measuring actual investor return — which depends heavily on leverage, principal paydown, and appreciation.

Use cap rate to screen. Use cash-on-cash and total return to decide.