Cap Rate

Capitalization rate, or cap rate, is a property's net operating income (NOI) divided by its market value, expressed as a percentage. NOI is the rent the property collects in a year minus the costs of running it: property management, insurance, taxes, maintenance and vacancy. It does not subtract mortgage payments, which is the point. The cap rate describes the asset itself, not how any particular buyer financed it. A $500,000 rental that collects $42,000 in rent and spends $12,000 running itself has an NOI of $30,000. Its cap rate is $30,000 divided by $500,000, or 6%. Buy it in cash and hold it, and that 6% is roughly what the building pays you before any change in value.

Cap rate and price move in opposite directions. When investors are willing to pay more for the same income, the cap rate falls. A 4% cap rate says the market prices this income as safe and likely to grow. An 8% cap rate says the market wants to be paid more to hold it, usually because the location, tenant or building carries more risk. So a higher cap rate is not automatically better. It is the market's asking price for risk. The useful question is whether the risk the number implies matches the risk you can actually see in the property, and whether you are being paid enough for it. Cap rates are also local. A 5% cap rate is generous for a new apartment building in a large coastal city and thin for an older single-family rental in a small market. Compare a listing against similar properties in the same place, not against a national average.

Fractional platforms often quote a projected yield rather than a cap rate, and the two are not the same thing. The yield is what reaches you after the platform's fees, the property's own costs and any reserves. The cap rate sits one layer up, before those deductions. Where a platform publishes a cap rate, Threeworld shows it on the listing. Where it does not, you can estimate one from the offering documents: take the projected annual rent, subtract the operating costs the sponsor lists, and divide by the purchase price including closing costs. If the sponsor's number is far above what similar properties in that market trade at, ask what makes this one different. The gap between a listing's cap rate and its distributed yield is the platform's cost of doing business. On Threeworld you can put listings from different platforms side by side and see how wide that gap is on each.