Encyclopedia
Cap rate
Capitalization rate, the property's net operating income divided by its price or value. It's a quick way to compare income properties, not a full measure of return.
For example: Two buyers look at the same building. One uses the seller's NOI, the other adjusts it for a vacant unit, and they get different cap rates. (Illustration only, not a real deal.)
This is a general industry term with no single official definition. Your lease or contract wording controls.
Example only, not a real client. Say you own a small retail building and a neighbour’s similar building sold at what sounds like a great cap rate. Before you price yours the same way, we check whether that figure was based on real rents or hoped-for rents, and how full the building was.
What I’d tell a friend
A cap rate is a quick way to compare, not a verdict. Ask where the number came from and what income sits behind it before you lean on it.
Why it matters to you
It's the quickest way to compare price to income. A small change in the cap rate moves the value a lot, so make sure the income behind it is real.
How to use it in your deal
Buyers should calculate the cap rate on actual, verified NOI and compare it with recent sales of similar properties. Ask whether a quoted cap rate uses actual or pro forma income. Remember the cap rate ignores financing, capital needs and lease expiries, so look at those separately. Sellers should support their pricing with clean NOI and good comparables. Lenders and appraisers use market cap rates in valuations.
Owners can track cap rate trends to judge timing for selling or refinancing. Ask how the seller calculated NOI before you compare their cap rate with any other, since some include vacant space at market rent.
Mistakes I see
Using pro forma NOI. Comparing properties with very different risk. Ignoring rising interest rates. Treating cap rate as total return.
In BC and Vancouver
No statute defines it; it's an industry measure. BC Assessment uses income approaches for some commercial valuations, and its methods are published.
Official sources: BC Assessment appeal guide · Bank of Canada: key interest rates
What the number is really saying
A cap rate links a building’s yearly net operating income to its price. A lower cap rate usually means buyers are paying more for each dollar of income, often because they see the income as safe or growing.
The figure is only as good as the income behind it. Make sure that income is what the building actually earns after a realistic allowance for vacancy and its running costs, and that it leaves out loan payments and one-off capital work.
Questions to ask before you sign
- Is NOI actual or pro forma?
- What are similar properties selling at?
- How do interest rates affect it?
- What capital spending is needed?
- What leases end soon?
Related guide: What cap rates really say in 2027.
Keep readingRelated terms: Net operating income (NOI), Cap rate compression, Cap rate spread, Stabilized NOI
- Buying a commercial property in BC, step by step
- Sale-leaseback for BC business owners
- How commercial property is valued in BC
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General information for British Columbia only. It isn’t legal, tax, accounting or financial advice, laws and rates change, and reading it doesn’t make you my client. Any numbers or scenarios are hypothetical. Check the linked official source and talk to a lawyer, accountant or other qualified professional before you act or sign anything. See the terms and disclaimer.