Cap rate
Cap rate, short for capitalisation rate, is net operating income divided by purchase price. It is this year's income yield on the property, before debt service and income tax.
Cap rate is a property yield: this year's net operating income divided by the price paid. NOI is rent minus the costs of running the building: tax, insurance, maintenance, management, vacancy. It is before the mortgage and before income tax, so the ratio describes the property rather than one buyer's financing or one buyer's bracket. A seller who quotes rent as NOI has not subtracted the costs. A buyer who treats a one-off repair as an operating cost has understated NOI. The formula will not catch either. It will only divide the number it is given.
The identity is , and run backwards it is a price: . A higher cap is a lower price for the same income. The cap rate calculator reports both directions, which is what makes two buildings comparable. Which direction is cheap depends on the market's cap, not on the formula. The formula will not name the market cap.
Two things sit outside it. Borrowing does not change the cap, because NOI and price do not include the loan. What borrowing changes is the return on the cash put in, a financial leverage question applied to a house rather than a balance sheet. Growth sits outside it too. If income is going to rise, a buyer will accept a lower cap today, the same split as dividend yield versus total return. A cap rate is the yield piece. It is silent on growth.