Cap rate

Definition

Net operating income over price, how property-heavy deals are quoted.

Why It Matters

An 8% cap rate on $200k of NOI is a $2.5M price. Self-storage, car washes, and anything priced on its real estate trade on a cap rate rather than a multiple of earnings, and the two are not interchangeable. A searcher who quotes an SDE multiple at a storage seller is speaking a different language from the person across the table.

In numbers: The same $200k of NOI is worth about $2.86M at a 7% cap rate and $3.33M at 6%; one point of cap rate moved the price nearly half a million dollars.