Cap rate is a quotient, not a quality

Net operating income divided by price. That is the whole definition, and it is why a cap rate cannot be good or bad on its own — it can only be high or low, and both have reasons.

The numerator is a definition, not a fact

Two brokers can quote the same building at 5.4% and 6.6% without either of them lying, because one of them put management in and the other did not, or one carried reserves above the line and the other below it. This is why we publish our net operating income definition and link to it from every cap rate on the site. If a cap rate arrives without one, it is not a number yet.

A high cap rate is a description of risk

Yield widens where exits are thin, leases are short, credit is weaker, or the building needs something. That is not a warning against buying — it is a statement of what you are being paid to take on, and the job is to decide whether the payment is enough.

It has no opinion about your loan

Cap rate is unlevered. At today's rates a building can carry a perfectly respectable cap rate and still fail debt coverage, which is the constraint that actually stops the purchase. Run the debt service coverage ratio before you get attached to the yield.

What we do with it

We state the going-in cap on in-place income, labelled, with the definition attached. Where there is a pro forma we state it separately, with the cost and the time it takes to get there carried as cash rather than assumed away. A pro forma cap rate printed next to a going-in cap rate, with no cost between them, is the most common way an investor is talked into a number.