Capitalization rate (or "Cap Rate") is a real estate valuation measure used to compare different real estate investments. A cap rate is often calculated as the ratio between the original capital cost (the price paid to buy the asset) and the net operating income produced by the asset .

Property Value: the original capital cost (the price paid to buy the asset) or its current market value .

Annual Gross Rent Income: the annual income from property lease before any operating cost.

Annual Vacancy Rate: If a property is leased out 95% of the time in a year. The annual vacancy rate is 5%.

Annual Operating Expenses: the annualized total expenses such as property tax, insurance, utilities, repairs, and any miscellaneous expenses.

The Cap Rate is defined as

Cap Rate = Annual Net Income / Property Value

where Annual Net Income = Annual Gross Rent Income * (1 - Annual Vacancy Rate) - Annual Operating Expenses