Cap Rate

Cap Rate — a fundamental metric in real estate investing that expresses the relationship between a property's annual net operating income (NOI) and its market value or purchase price. A property generating $10,000 in annual NOI with a value of $100,000 has a cap rate of 10%. Higher cap rates generally signal higher potential returns but may also reflect greater risk or less desirable locations.

For mortgage note investors, cap rate matters when evaluating the collateral behind a note. A property with a strong cap rate in a stable rental market provides better security for the underlying loan, while an unusually high cap rate in a declining area may signal risk. Cap rates also help note buyers assess whether a borrower's investment property generates enough income to support ongoing mortgage payments.