Definition
The capitalization rate (cap rate) is the primary indicator for income property valuation. It measures net income yield on market value, without considering financing.
Formula: Cap Rate = NOI ÷ Market Value × 100%
Or inversely to estimate value: Value = NOI ÷ Cap Rate
Example: - Triplex with NOI of $30,000/year - Local market cap rate for similar triplexes: 4.5% - Estimated value: $30,000 ÷ 0.045 = $666,667
Typical cap rates in Quebec (2024): - Montreal (central neighbourhoods): 3.5-4.5% for duplexes/triplexes - Laval, suburbs: 4-5% - Medium cities (Quebec City, Sherbrooke): 5-7%
Inverse cap rate/value relationship: when interest rates rise, cap rates generally increase, which lowers income property values (same NOI for a lower value).