Cap rate, short for capitalization rate, is a property's net operating income as a percentage of its price or value. It is the pre-tax return the property would produce in a year if you bought it with all cash.
Cap rate = net operating income ÷ (property price + up-front repairs)
A fourplex priced at $400,000 produces net operating income of $28,000 a year. It needs no work, so its cap rate is $28,000 ÷ $400,000 = 7%. If a property needs repairs before it can be rented, add them to the price, as the cap rate calculator and the app do. The formula also runs in reverse to estimate value. If similar buildings nearby sell at a 7% cap rate and you raise NOI to $31,500, the building is worth about $31,500 ÷ 0.07 = $450,000.
Cap rate lets you compare properties without the loan getting in the way, but that is also its limit. It says nothing about your return once financing is involved, which is the job of cash-on-cash return. A common mistake is calculating it from the seller's projected NOI instead of realistic income and expenses. A higher cap rate is not automatically a better deal either. It often reflects more risk, such as a weaker location or an older building, and typical cap rates vary widely by market and property type.