Cap Rate Made Simple: The 6.5% Reality Check

Cap rate is one of the simplest ways to begin evaluating an income-producing property. Divide Net Operating Income by the purchase price: $130,000 in annual NOI divided by a $2,000,000 price produces a 6.5% cap rate. But the percentage is only a starting point. A higher cap rate can come with greater risk, such as a weaker location or tenant, while a lower cap rate may reflect a stronger tenant, longer lease, or more dependable income. In Frisco, Texas, where residential market conditions continue to evolve, investors should examine the complete picture—including lease terms, expenses, financing, property condition, and market fundamentals. This example is for educational purposes only.