Cap rate explained: formula, example and how it differs from yield
Cap rate (capitalization rate) is the ratio of a property’s net operating income to its market value, as a percentage. The formula is cap rate = NOI / market value × 100%. It shows a property’s return without financing, over one year, so you can compare properties side by side and judge whether you are buying expensive or cheap.
What cap rate is and why it matters
Cap rate answers the question: “What percentage of the property’s price does it return as net income over a year, if you buy it without a loan?” It is a baseline metric for commercial real-estate investors, a quick way to gauge whether a purchase will pay off and how risky the property is.
The key term in the formula is NOI (Net Operating Income): the annual rent minus operating expenses (property tax, maintenance, insurance, management), but before loan payments and depreciation.
How to calculate cap rate: formula and example
Formula: cap rate = NOI / market value × 100%
Here is a hypothetical example (the figures are illustrative, not market data):
- The property costs €200,000.
- Rent is €1,200/mo, i.e. €14,400/yr.
- Operating expenses are €2,400/yr.
- NOI = 14,400 − 2,400 = €12,000.
- Cap rate = 12,000 / 200,000 × 100% = 6%.
The same calculation works in reverse: if you know the cap rate typical for the market, you can estimate a fair price. With an NOI of €12,000 and a market cap rate of 8%, the property is “worth” 12,000 / 0.08 = €150,000. That’s why professionals say not “the price went up” but “the cap rate compressed.”
What counts as a “good” cap rate
There is no universal “good” value; it all depends on the property type, location and market. But there is a simple rule of thumb: a low cap rate = an expensive, relatively safe property; a high one = cheap, but riskier.
| Cap rate | What it usually signals | Who it suits |
|---|---|---|
| Low (≈ 4 to 6%) | Expensive property, stable tenant, good location | Those seeking reliability rather than maximum return |
| Medium (≈ 6 to 8%) | A balance of price and risk | Most commercial real-estate investors |
| High (≈ 9%+) | Cheap, but with risk: weak tenant, vacancy, poor location | Those willing to take on risk for return |
A high cap rate is not always a gift. Often it is the price of risk: vacant space, an unreliable tenant, or a location that is hard to resell. A low cap rate means you pay a premium for stability.
How cap rate differs from gross and net yield
These three metrics are often confused. The difference is in the numerator and in how financing is treated.
| Metric | Formula | Accounts for expenses | Accounts for financing |
|---|---|---|---|
| Gross yield | annual rent / value | No | No |
| Net yield | NOI / value | Yes | No |
| Cap rate | NOI / market value | Yes | No |
By formula, cap rate and net yield almost coincide. The difference is more about practice: net yield is usually calculated against the price you paid for the property, while cap rate is calculated against the current market value and is used to value the property itself (capitalization, hence the name). For a detailed breakdown of yield, NOI and the payback period, see the post “Property yield and payback”.
In short: gross yield is for a quick estimate, while cap rate is for comparing properties and understanding whether you are buying expensive or cheap.
What cap rate doesn’t show
Cap rate is a useful but “flat” indicator. It has blind spots:
- It ignores financing. Cap rate is calculated as if the property were bought with your own money. With a mortgage, the actual return on invested capital (cash-on-cash) will be different.
- It is a snapshot of one year. Cap rate doesn’t see future rent growth, indexation, or, conversely, an upcoming vacancy.
- It ignores appreciation. A property with a low cap rate can appreciate quickly, and the reverse happens too.
- It depends on an honest NOI. If you understate expenses, the cap rate inflates on paper. Calculate NOI from real costs.
That’s why cap rate is viewed not in isolation but alongside net yield, the payback period and appreciation.
Why this matters in the Moldovan market
Leasing is a growing segment: according to SFS data, in January to May 2026 the budget collected 47.5 million lei in income tax on rent (+27.9% year over year), and the number of registered lease contracts grew by 34%, to ≈ 15,788 (source: SFS, 2026). The more players there are, the more important it becomes to measure return on a single, consistent metric.
Keep a tax nuance in mind when calculating NOI: income earned by individuals from leasing immovable property in Moldova is subject to a final income tax, and the commonly applied rate is 7%. This affects your net income, so confirm the current rate and your specific obligation with the SFS (Serviciul Fiscal de Stat) or an accountant. This is not tax advice.
Fix the currency, too: cap rate is compared across properties in the same currency (EUR/MDL/USD/RON at the BNM rate; EUR/MDL ≈ 19.4 is illustrative), otherwise the numbers won’t be comparable.
How KX Estate calculates cap rate for you
In Excel, calculating the cap rate for a single property is easy, but across a portfolio of 20 to 50 units in different currencies it turns into manual reconciliation. KX Estate calculates cap rate, NOI, net yield, the payback period and appreciation for each property automatically, in EUR/MDL/USD/RON, with National Bank of Moldova rates, so you compare properties fairly and in a single click.
Frequently asked questions
Are cap rate and yield the same thing?
Almost. By formula, cap rate matches net yield: both compute NOI / value. The difference is in practice. Net yield is usually calculated against your purchase price, while cap rate is calculated against the current market value and is used to value the property.
What is a good cap rate?
There is no single answer; it depends on the property type and the market. A low cap rate (≈ 4 to 6%) usually means an expensive, stable property; a high one (≈ 9%+) means cheap but risky. Most commercial real-estate investors aim for the medium range of ≈ 6 to 8%.
Does cap rate account for financing?
No. Cap rate is calculated as if the property were bought without borrowed funds. To see the return including a mortgage, you look at a separate metric: the cash-on-cash return (return on invested capital).
How do I estimate a property’s price using cap rate?
Divide NOI by the cap rate you want. For example, with an NOI of €12,000 and a market cap rate of 8%, the fair price is ≈ 12,000 / 0.08 = €150,000. This is how a property is valued “from its return.”
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