SOBE Knowledge
What Is a Cap Rate?
Net operating income divided by market value — the yield the market itself is pricing, and the inversion professionals use to value income property.
What a cap rate is
The capitalisation rate is a property’s net operating income divided by its market value — the yield the market itself is pricing, independent of who owns the asset or what they paid.
It answers a different question from rental yield. Your net yield measures income against your historic cost — price, taxes, renovation. The cap rate measures the same income against what the property is worth today. Same numerator, different denominator: one is personal, the other is the market’s verdict.
The formula — and its powerful inversion
Value = NOI ÷ cap rate
The inversion is where the concept earns its keep: income-producing property is priced by dividing its stabilised NOI by the rate the market applies to assets of that type and quality. This is how professionals value rental stock — and why small movements in the rate produce large movements in price.
A worked example — the sensitivity that moves fortunes
Take an apartment producing €17,400 of NOI a year:
One percentage point of cap rate moved the value by €110,000 without a single euro of rent changing. When interest rates shift or a district re-rates, this is the arithmetic doing the moving.
Find the NOI first
SOBE Buy-to-Let Yield Calculator
Real rent, real costs, honest NOI — the numerator every cap-rate conversation depends on.
Why Costa del Sol cap rates run low
Prime lifestyle markets price below purely “financial” markets, and Marbella is a textbook case: a large share of buyers are purchasing use and scarcity, not spreadsheets, and they accept lower income returns for irreplaceable locations. Capped supply — see Ley de Costas — does the rest. A low cap here is not automatically “expensive”; it is the price of assets that rarely return to the market. The discipline is knowing which low caps are scarcity and which are just optimism.
Four ways a cap rate misleads
1. Gross dressed as NOI. A “cap rate” computed on gross rent isn’t one. Insist on the cost breakdown behind the numerator.
2. Trailing vs stabilised. Last year’s NOI with a vacancy, or next year’s with imagined rent growth — both are stories. Ask which year the number lives in.
3. Cross-market comparisons. A Marbella apartment and a provincial office block at the same cap are not the same risk, the same liquidity or the same tenant. Caps compare like with like, or nothing.
4. Forgetting it is a snapshot. Cap rate ignores financing, taxes and time entirely — that is ROI and IRR territory. Use each instrument for its own reading.
Frequently asked questions
What is a typical cap rate in Marbella?
Prime Costa del Sol stock trades at low single-digit cap rates - lifestyle demand and capped supply price income returns below purely financial markets. Secondary locations and short-term-rental assets price higher, reflecting more risk and work.
Is a higher cap rate better?
Higher means more income per euro of value - and usually more risk, less liquidity or a weaker location. The rate is a price of quality, not a score.
What is the difference between cap rate and rental yield?
Same numerator, different denominator: net yield divides NOI by your historic total cost; cap rate divides it by current market value. Yield is personal, cap rate is the market's.
Does cap rate include the mortgage?
No. It is an unlevered, pre-financing measure - which is exactly why it travels well between buyers with different funding. Financing effects belong to cash-on-cash return and IRR.
How do interest rates affect cap rates?
Rates set the return investors can earn elsewhere, so caps tend to follow them with a lag. When caps expand, values compress arithmetically - one point of cap on a 3.5% asset moves value by roughly a fifth.