What is it?
The cap rate (capitalization rate) is a building’s yearly net operating income (NOI) divided by its price. For example, if a building with NOI of $100,000 a year sold for $2,000,000, the cap rate is 5% (a made-up example).
MPAC (Ontario’s property assessment agency) explains that it analyzes the relationship between income and sale price and finds the cap rate by dividing the income by the sale price. Working the other way, dividing NOI by the cap rate gives a rough value for the building.
Why does it matter?
- The lower the cap rate, the higher the value for the same income. A lower rate is usually applied when the risk is seen as lower.
- When the cap rate rises, a building with the same income is worth less. Example: with NOI of $100,000, a 5% cap rate gives $2,000,000 and 7% gives about $1,428,571 (a made-up example).
- The cap rate changes with the time, the type of building, the area and the tenants, so do not use one number as it is. It tends to rise when interest rates rise. (A general principle, not a rule.)
What to watch out for
The cap rate only shows “how much it earns”. Check the building’s condition, the lease terms, when big repairs are due, and the loan terms separately. Check the seller’s NOI against the leases, bills and tax returns.
What the law and official sources say
Quotes are copied word for word. The "In plain words" lines are our explanation, not an official translation.
We then analyze the relationships between income and sale price to calculate the capitalization rate (cap rate) for the property by dividing the income by the sale price.In plain wordsThe cap rate is the income divided by the sale price.
Source: mpac.ca/en/UnderstandingYourAssessment/ThreeApproachesValue · checked Oct 30, 2026
Capitalization Rate — a divisor (usually expressed as a percentage) used to convert into value the expected Economic Income of a normalized single period.In plain wordsThe cap rate is the divisor (usually a percentage) used to turn a normal year’s expected income into a value.
Source: cbvinstitute.com/wp-content/uploads/2021/11/International-Valuation-Glossary-Business-Valuation_EN.pdf · checked Nov 2, 2026
Common questions
Is a building with a lower cap rate a better building?
Not necessarily. A low cap rate can be a building the market sees as lower risk, but it also means a higher price. Look at income, risk and price together.
Is the cap rate the same as a loan interest rate?
No. The cap rate is a building’s income divided by its value, and the loan interest rate is the interest you pay on borrowed money. The gap between the two affects cash flow.
Guides that use this term
Sources checked
- MPAC, Three Approaches to Value · checked Oct 30, 2026
- CBV Institute, International Valuation Glossary · checked Nov 2, 2026