What is a cap rate?

Capitalization is the process of converting future income into value. The method of gathering data to determine the cap rate is more complex. The process begins by collecting data on the sale of all income-producing properties, generally within a specific geographical location.

And then, from that data, the net operating income and the sales price of those various sales are used to compute the cap rate for each sale. When the appraiser or the investor wants to generate an estimated value of a property, they will use the cap rates of comparable sales to derive the estimated cap rate