Understanding Cap Rate (Capitalization Rate)
By Brian Harris – Investor-Friendly Real Estate Agent, Phoenix, AZ
What is Cap Rate?
Cap Rate (Capitalization Rate) is a fundamental metric used to evaluate the expected return on a real estate investment, without considering debt.
Formula:
Cap Rate = Net Operating Income (NOI) / Current Market Value (or Purchase Price)
Why It’s Important
Compares Properties Quickly: Cap Rate helps investors evaluate how much income a property is expected to generate relative to its price.
Debt-Agnostic: It provides a neutral view, not influenced by mortgage terms or financing.
Risk Indicator: Higher Cap Rates often indicate higher potential returns but come with more risk; lower Cap Rates suggest stability and predictability.
Example:
You’re considering a Phoenix duplex priced at $500,000. It generates an NOI of $35,000/year.
Cap Rate = $35,000 / $500,000 = 7%
That 7% is your expected annual return if you bought the property in cash. Compare that to other Phoenix-area opportunities and you can quickly identify which ones are priced right or worth a deeper look.
What’s a Good Cap Rate?
In Phoenix’s current market (Q3 2025), Cap Rates typically range from 5%–8% depending on location, condition, and tenant quality.
A lower Cap Rate might be acceptable in high-demand areas or when appreciation is strong.
A higher Cap Rate may offer better short-term cash flow but might reflect a less stable tenant base or greater maintenance needs.
Final Thoughts
Cap Rate is one of many tools smart investors use to evaluate opportunities — but context matters. Pair it with market trends, financing terms, and your long-term goals.
As your investor-friendly real estate expert here in Phoenix, I help you see the full picture — not just the numbers.
📞 Contact Me Today
Brian Harris
Investor-Friendly Real Estate Agent
📍 Phoenix, AZ
📧 [email protected] | 📞 602-684-0198
🌐 www.azdreamsource.com
