Cap rate, short for capitalization rate, is a property's annual net operating income expressed as a percentage of its price. Because a NNN tenant pays taxes, insurance, and maintenance, NOI on a net lease property is close to the rent itself — which makes cap rate an especially clean way to compare one NNN listing against another.
Think of it as the unlevered yield you would earn if you paid all cash. The higher the cap rate, the more income you are buying per dollar — and, usually, the more risk the market sees in the deal.
How to Calculate Cap Rate
Cap Rate = Net Operating Income ÷ Purchase Price
Example: a single-tenant NNN property earns $150,000 in annual NOI and is listed at $2,500,000. $150,000 ÷ $2,500,000 = a 6.00% cap rate.
What Moves NNN Cap Rates
- Tenant credit and guarantee — a corporate guarantee from an investment-grade tenant compresses cap rates.
- Lease term remaining — more years of guaranteed rent means less re-leasing risk.
- Rent escalations — scheduled bumps grow NOI over the hold period.
- Location and real estate fundamentals — traffic counts, demographics, and land value if the tenant leaves.
- Interest rates — as borrowing costs rise, cap rates tend to follow.
Cap Rate vs. Cash-on-Cash Return
Cap rate measures the property; cash-on-cash return measures your investment after financing. With a loan, your cash-on-cash return can land above or below the cap rate depending on your interest rate and leverage.