Cap rate is a comparison tool
Cap rate can help compare properties on an unlevered operating basis when the income and expense assumptions are prepared consistently.
The assumptions matter more than the formula
Overstated rent or understated expenses can make a weak investment look attractive. Use conservative inputs and verify them independently.
Pair cap rate with other questions
Consider cash required, financing, repair scope, tenant risk, exit plan, neighborhood demand and the property’s functional layout.
Want to apply this to a real property?
Use the guide as a starting point, then discuss the specific property, neighborhood and objectives with the appropriate professionals.