Rental Yield vs. Cap Rate?

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Commercial Real Estate (CRE) Investor Question #90: What is the difference between rental yield and cap rate?

Rental yield is the net amount of money a landlord receives in rent over one year (after deducting operating expenses), shown as a percentage of the amount of money invested in the property.

So, Rental Yield = (Net Annual Rental Income / Cost) X 100

Note that rental yield is calculated on Net Operating Income without considering interest payment, tax and depreciation.

Cap rate (or capitalization rate) is the ratio between the net operating income produced by a real estate asset and its cost (or current market value).

So, Cap Rate = Net Operating Income / Value (or cost)

If you notice, both rental yield and cap rate appears to be same!

Rental yield is used to calculate the yield (return) of an asset whereas the cap rate is used to find the value (capitalized value) of an income generating real estate asset.