The capitalization rate — or cap rate — is one of the first metrics every real estate investor learns, and for good reason. It provides a quick snapshot of a property's potential return relative to its purchase price.
How to calculate cap rate:
Cap Rate = Net Operating Income (NOI) / Purchase Price × 100
For example, if a property generates $80,000 in annual NOI and you purchase it for $1,000,000, the cap rate is 8%.
What does the cap rate tell you?
A higher cap rate generally indicates higher potential returns but may also signal higher risk. A lower cap rate often reflects a more stable, lower-risk investment — think Class A properties in prime locations.
In South Florida, multifamily cap rates typically range from 5.5% to 8.5%, depending on the asset class, location, and condition. Value-add properties in emerging neighborhoods tend to offer higher cap rates, while stabilized assets in established areas trade at lower caps.
Important considerations:
- Cap rate is just one metric. Always pair it with cash-on-cash return, DSCR, and IRR analysis.
- Cap rates vary by market, property type, and economic conditions.
- A "good" cap rate depends on your investment strategy and risk tolerance.
- Don't compare cap rates across different markets without context.
At Jezelle Investments, we underwrite every deal with a comprehensive financial model that goes well beyond cap rate. But it remains an essential starting point for evaluating whether a deal deserves a deeper look.