Underwriting Academy
Commercial Real Estate FAQ
Deepen your underwriting vocabulary. Learn the calculations, standard risk limits, and underwriting methodology utilized by banks and real estate sponsors.
The **Capitalization Rate (Cap Rate)** is a fundamental real estate metric representing a property's unleveraged, initial rate of return. It represents the ratio between the net operating income (NOI) a property produces and its purchase price.
Cap Rate = (Net Operating Income / Purchase Price) × 100
Investors utilize Cap Rates to quickly compare properties in different locations. A higher cap rate generally indicates greater yield but also represents higher underlying market or operational risks (e.g., higher vacancy rates, neighborhood crime, older construction).