Cap rate (kapitalizační míra)
The ratio of annual net operating income (NOI: rent minus operating costs, excluding loan payments) to the property's current market value. It is used mainly for commercial and rental buildings and in the income approach to valuation: value = NOI / cap rate. A higher cap rate means a higher yield, but also a lower price for the same income.
Example
A flat brings a net operating income of CZK 162,000 a year. If the market values similar flats at a cap rate of 3.5 %, the value is roughly CZK 4,630,000. When, with mortgage rates rising to 5.00 %, investors demand 4 %, the income value falls to CZK 4,050,000, which is CZK 580,000 less for the same rent.
In practice
Bank valuers use the income approach mainly for apartment buildings and commercial property; for individual flats the comparative method prevails. For an investor, cap rate is a quick test of whether the price matches the income. Feed it net operating income, not gross rent, or the value comes out inflated.
How it differs
The reference point sets it apart: net yield usually relates to your purchase price, cap rate to the current market value, which is why it serves for valuation. IRR covers the whole holding period including price growth and the sale, whereas cap rate is a snapshot of one year.
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