**The cap rate** is a property's annual [[Net operating income (NOI)|NOI]] divided by its **market value** — the unlevered yield a buyer accepts. A 5% cap means the building, bought all-cash, pays for itself in 20 years. Low caps (4–4.5%) signal stable, low-risk income; high caps (7–8%) demand more income to compensate for risk. Two uses that matter: - **Valuation by NOI.** Value = NOI ÷ cap rate. Lift NOI, or buy where caps compress, and value re-rates. Since you can't know your exit cap at purchase, you model a *range* of exit caps → a range of exit prices → a range of returns. - **Entry cap > exit cap** is the redevelopment bet: buy at a high going-in cap, stabilize the asset, exit at a lower cap once it looks less risky. Distinct from [[Unlevered yield on cost AKA cap rate (UYOC)|yield on cost]], which divides NOI by what you *paid* rather than by market value — the two coincide only if you buy exactly at market. **Residential caveat:** appraisers value homes on comps and **market** rents, not your above-market rents. So an NOI uplift earns credit on a sale to a cap-rate buyer (a multifamily portfolio), but **not** on a [[Refinance|refi]] appraisal.[^1] Related: [[Net operating income (NOI)]] · [[Unlevered yield on cost AKA cap rate (UYOC)]] --- *Changelog* - 2026-06-15 Added residential caveat, removed refi. - 2026-06-15 Distinguished from UYOC. - 2026-06-08 NOI definition. [^1]: Paul Stanton, quoted in [[Refinance]].