Brokers use cap rate as the standard quick comparison across deals. A 6% cap rate on a $10M building implies $600,000 of net operating income (NOI) — the figure left after operating expenses but before debt service, depreciation and taxes. Lower cap rates mean higher prices for the same income (a 5% cap is more expensive than a 7% cap); higher cap rates compensate for higher perceived risk.
The key is that cap rate is a snapshot, not a forecast. It does not capture leverage, growth, or capex needs. Two deals at the same headline cap rate can have very different actual returns once you layer on a senior loan, a value-add plan, or a roll-down on the rent schedule. Brokers serious about underwriting compute cap rate from a T-12 (trailing 12 months) rather than from a pro forma the seller wrote.
