8.3 Capitalization Rate Analysis
The capitalization rate (cap rate) is the most widely used metric for evaluating investment properties. It represents the relationship between a property's net operating income and its purchase price or current market value.
A higher cap rate generally indicates a higher risk investment with potentially greater returns, while a lower cap rate suggests a more stable, lower-risk property. In the Minneapolis metro area, cap rates for multifamily properties typically range from 5.5% to 7.5% as of 2026.
An investor is evaluating a 12-unit apartment building in the Uptown neighborhood of Minneapolis. The property is listed at $525,000 and generates $62,400 in gross annual rent with $24,800 in operating expenses.
NOI = $62,400 - $24,800 = $37,600
Cap Rate = $37,600 / $525,000 = 7.16%
This cap rate of 7.16% is slightly above the Minneapolis metro average, suggesting either higher risk or an undervalued property worthy of further analysis.