Quick answer. A cap rate, short for capitalization rate, is a property’s annual net operating income divided by its price. A building that produces $159,250 of net operating income and sells for $2,450,000 trades at a 6.50% cap rate. It measures first year yield with no mortgage in the picture. It is not a return, and it says nothing on its own about whether the income behind it will still be there in year seven.
The formula
There is only one equation, and it gets rearranged depending on what you already know.
| You want | Formula | When you use it |
|---|---|---|
| Cap rate | NOI ÷ Price | A property is offered at a price and you want the yield |
| Value | NOI ÷ Cap rate | You know the income and the going rate for that kind of asset |
| NOI | Price × Cap rate | Checking whether a quoted cap rate and a quoted price agree |
That third form is worth running on every offering memorandum you read. Brokers make arithmetic errors more often than you would expect, and the price, the cap rate and the stated NOI on the cover page do not always reconcile.
A worked example
Take a freestanding retail building on a corporate lease. Base rent is $166,600 a year. The landlord carries $7,350 of costs the tenant does not reimburse, mostly insurance deductible exposure and a small share of the shared parking maintenance. Net operating income is $159,250. The seller is asking $2,450,000.
$159,250 ÷ $2,450,000 = 0.065, or a 6.50% cap rate.
Now hold the income constant and change nothing about the building. If a buyer decides that asset should trade at 8.00% instead, the same $159,250 supports a price of $1,990,625. The rent did not change. The roof did not change. The value moved $459,375 because the market’s view of the risk moved 150 basis points. That sensitivity is the entire reason cap rates matter, and it is also why arguing about a tenth of a point in a letter of intent is rarely where the money is.
What belongs in net operating income, and what does not
Most bad cap rate math is bad NOI math. The denominator is a number you can verify with a purchase contract. The numerator is a construction, and reasonable people build it differently.
| Include | Exclude | Judgment call |
|---|---|---|
| Contractual base rent | Mortgage principal and interest | Vacancy and credit loss |
| Expense reimbursements actually collected | Depreciation and amortization | Management fee, even on a self-managed asset |
| Percentage rent earned in the trailing period | Capital expenditures and tenant improvements | Replacement reserve for roof, HVAC and parking |
| Recurring ancillary income such as billboard or cell site rent | Leasing commissions | Non reimbursed insurance in a hard market |
| Income taxes and one time items |
In practice, single tenant net lease deals are usually quoted on in place contractual rent with no management fee and no reserve deducted. That is the market convention and there is nothing dishonest about it, but it does mean a quoted 6.50% is a slightly generous version of what will actually land in your account. On a 25 year old building with an aging roof, subtract a real reserve before you compare two deals against each other.
What is a good cap rate right now
There is no single answer, which is an unsatisfying thing to say and also the truth. A 5.25% cap rate on a ground leased asset with 18 years of term and an A rated obligor can be a better piece of paper than an 8.25% cap rate on a franchisee lease with four years left. What you can do is anchor yourself to where the market is asking today.
Across the 6,766 active net lease listings InvestmentGrade.com tracks with a published cap rate, the median asking cap rate is 6.35% as of October 23, 2026, with the middle half of listings between 5.75% and 7.08%. By tenant rating, the medians look like this:
| Tenant rating category (S&P, or Moody’s equivalent) | Median asking cap rate | Middle half of listings | Listings (tenants) |
|---|---|---|---|
| AA | 5.25% | 4.75% to 6.13% | 55 (6) |
| A | 5.25% | 5.00% to 6.00% | 332 (19) |
| BBB | 6.60% | 6.00% to 7.35% | 1,139 (24) |
| BB | 6.25% | 5.50% to 7.25% | 223 (16) |
| B | 7.00% | 5.75% to 8.41% | 385 (10) |
| Not publicly rated (private companies) | 6.00% | 5.16% to 7.50% | 722 (24) |
Active listings InvestmentGrade.com tracks with an asking cap rate (stated, or computed from stated income and price when no rate is stated), listings last observed October 23, 2026, grouped by the rating of tenants rated in their own name; franchised brands rated only through a parent company are left out because a parent’s rating applies to a franchisee’s lease only if the parent signs or guarantees it. Asking cap rates are not closed-sale cap rates, and location, lease term, and ground lease structure move cap rates as much as the rating. Categories with fewer than 5 listings are not shown (CCC and lower).
The averages hide the part that matters. Assets combining an investment grade tenant with long remaining term are a small share of the inventory on the market. The number of properties available can rise while the number of properties most 1031 buyers will actually accept barely moves. That is why the good deals still trade tight while the average drifts.
How cap rates relate to interest rates
Cap rates are priced off the risk free rate plus a spread for everything a Treasury does not carry: illiquidity, credit risk, re-tenanting risk, and the cost of owning a physical building.
The 10-year Treasury yield was 5.24% on October 1, 2026, up from 4.12% a year earlier. Set that against the 6.35% median asking cap rate across the listings we track and the spread is +111 bps. Historically that gap has run closer to 250 or 300 basis points. Net lease pricing has not fully repriced to the current cost of capital, which is a polite way of saying sellers are still anchored to 2021 and buyers are not.
Two things follow. First, a property bought at a thin spread depends on rate relief to work, and the Federal Reserve raised its target range in September 2026 rather than cutting it. Second, spread compression of this kind usually resolves through time rather than through a crash, because most net lease owners have no forced seller pressure. We cover the mechanics in more detail on cap rates and interest rates.
Cap rate, cash on cash, and IRR
These get used interchangeably in conversation and they measure three different things.
| Metric | What it measures | Debt included | Time horizon |
|---|---|---|---|
| Cap rate | First year unleveraged yield | No | One year |
| Cash on cash | Cash distributed against cash invested | Yes | One year |
| IRR | Annualized return across the full hold, including sale | Optional | Whole hold period |
A 6.50% cap rate with 2% annual rent bumps and a 10 year hold behaves very differently from a 6.50% cap rate on flat rent, and the cap rate will not tell you that. The escalation schedule is usually worth more than the twenty five basis points people spend two weeks negotiating.
Five places a cap rate misleads you
1. The rent is above market. If the tenant is paying $28 a foot in a $19 a foot submarket, the cap rate is real today and fictional the day that lease expires. Check rent against comparable space before you check anything else.
2. The name on the building is not the name on the lease. A franchisee operating 11 units guarantees the rent, not the national brand. The brand sells the property, the guarantor pays for it. Our bond and credit rating reference is the starting point for telling the two apart.
3. Ground lease against fee simple. A ground lease cap rate and a fee simple cap rate are not comparable numbers. One buys the dirt under a building someone else owns and depreciates almost nothing. The other buys the building too.
4. Remaining term. See the $459,375 swing above. Term is the single largest driver of net lease pricing after credit, and a property with four years left is a re-tenanting project wearing an income statement.
5. Proforma NOI. If the income used in the cap rate includes a vacant suite leased at an assumed rent, you are being quoted a hope, not a yield. Ask for the rent roll and the trailing twelve.
How NNN and 1031 buyers should actually use it
Use the cap rate to sort, not to decide. It is a fast way to rank twenty offerings into a shortlist of four. After that it stops being useful and the underwriting questions take over: who signs the lease, what happens in year one after expiration, how the rent escalates, whether the site works for a second generation user, and what the debt market will do with it when you sell.
For 1031 buyers the constraint is worse, because the 45 day identification clock pushes people toward whatever is available rather than whatever is right. A cap rate that looks generous under deadline pressure is usually generous for a reason someone else already found.
- Current NNN cap rates by tenant credit quality
- 1031 exchange rules and replacement property strategy
- What a triple net lease actually covers
- Dollar General credit rating and cap rate profile
- Walgreens credit rating and cap rate profile
Frequently asked questions
How do you calculate a cap rate?
Divide annual net operating income by the purchase price. A property with $159,250 of net operating income priced at $2,450,000 has a 6.50% cap rate. Net operating income is rent and reimbursements less the operating costs the owner actually bears, before any mortgage payment.
What is a good cap rate?
It depends on what is producing the income. Across the active net lease listings InvestmentGrade.com tracks, the median asking cap rate is 6.35% as of October 23, 2026. Investment grade tenants on long leases usually trade below that median. Non rated and franchisee backed leases usually trade above it.
Is a higher cap rate better?
A higher cap rate means more first year income per dollar spent, and it also means the market has priced more risk into that income. The useful question is whether the extra yield fairly compensates for weaker credit, shorter term, or a harder to re-lease building. Often it does not.
What is the difference between cap rate and ROI?
Cap rate is a single year unleveraged yield on the purchase price. Return on investment usually accounts for financing, appreciation and the eventual sale. Two properties can carry the same cap rate and produce very different returns depending on rent escalations, debt terms and exit pricing.
Do cap rates rise when interest rates rise?
Usually, though with a lag and not one for one. Cap rates are priced as a spread over Treasury yields. When Treasury yields rise faster than cap rates, that spread compresses, which is what has happened through 2026: the 10-year Treasury yield was 5.24% on October 1, 2026 against a 6.35% median asking cap rate across the listings we track.
What cap rate should a 1031 buyer expect in 2026?
Across the listings we track, the median asking cap rate is 6.35%, and pricing varies with tenant credit, lease term and structure. Anything meaningfully above the sector average is carrying a specific risk, and identifying that risk before the 45 day deadline is the whole job.
Sources and method
Cap rate figures are medians of the active net lease listings InvestmentGrade.com tracks with a published asking cap rate, refreshed weekly. Treasury yields are daily constant maturity yields from the Federal Reserve Bank of St. Louis (FRED). Cap rates by tenant credit quality are maintained on our NNN cap rates page. This page is educational and is not investment, tax or legal advice.
