Cap rate, defined

Cap rate — short for capitalization rate — is a rental property's annual net operating income divided by its price or value, expressed as a percentage. It answers a simple question: if you paid all cash, what return would this building produce in a year? Because it ignores financing, cap rate lets investors compare very different properties on equal footing.

The cap rate formula

The formula is straightforward:

Cap Rate = Net Operating Income (NOI) ÷ Property Value × 100

To use it, you need two numbers:

  • Net operating income — annual rental income minus operating expenses (taxes, insurance, maintenance, management, utilities, water/sewer). It does not subtract mortgage payments.
  • Property value — the purchase price or current market value.

Divide the first by the second and multiply by 100. A building generating $120,000 in NOI at a $2.4 million value carries a 5% cap rate.

What cap rate tells you (and what it doesn't)

Cap rate is a snapshot, not a full picture. A higher cap rate signals more income relative to price — often meaning more risk, more hands-on work, or a softer location. A lower cap rate usually reflects a stable, high-demand market where buyers pay a premium for reliability.

What it leaves out matters just as much:

  • It ignores your mortgage, so two identical buildings have the same cap rate regardless of financing.
  • It doesn't account for appreciation or future rent growth.
  • It's only as accurate as your NOI. Underestimate expenses and the cap rate looks better than reality.

For a quicker back-of-envelope screen, investors sometimes pair it with the gross rent multiplier, which uses gross rent instead of NOI.

How cap rate works in NYC

New York rarely behaves like national averages. Dense, high-demand neighborhoods across Brooklyn and Manhattan often trade at lower cap rates than markets elsewhere, because buyers accept a smaller current yield in return for durable occupancy and long-term appreciation.

The bigger wrinkle is rent stabilization. In a regulated building, rents can only rise by the legal guideline amounts set each year, which caps how fast NOI — and therefore cap rate — can grow. Accurately modeling a stabilized building's income takes real familiarity with DHCR rules, allowable increases, and how compliance costs hit the expense line. Treating a stabilized asset like a free-market one is one of the most common valuation mistakes we see.

A quick example

Say you're weighing a small multifamily in Bed-Stuy priced at $1,800,000. After collecting $150,000 in annual rent and subtracting $60,000 in operating expenses, your NOI is $90,000.

$90,000 ÷ $1,800,000 × 100 = 5% cap rate.

Now compare that against similar buildings on nearby blocks. If comparable stabilized properties trade around 5%, the price is roughly in line; if they trade at 5.5%, you may be paying a premium.

Get an accurate read on your building

Cap rate is only as good as the numbers behind it — and in NYC, those numbers hinge on getting rent regulation, expenses, and occupancy right. If you own or are evaluating a Brooklyn building, request a property consultation or talk to a principal at Yak Management. We'll help you understand what your property actually earns and how disciplined management can move the number in your favor.