Cap Rate Calculator
Commercial Real Estate Investment Analysis
Understanding Capitalization Rate (Cap Rate)
The Capitalization Rate, commonly known as the Cap Rate, is the most fundamental metric in commercial real estate. It represents the expected annual rate of return on a real estate investment property based on the income the property is expected to generate.
How the Cap Rate Formula Works
To calculate the Cap Rate, you divide the property's Net Operating Income (NOI) by its current market value or purchase price. The formula looks like this:
Cap Rate = (Net Operating Income / Property Value) × 100
Practical Example Calculation
Imagine you are evaluating a retail strip mall with the following profile:
- Purchase Price: $2,000,000
- Total Annual Rent: $180,000
- Operating Expenses: $40,000 (Taxes, Insurance, Repairs)
- Vacancy (5%): $9,000
Your Net Operating Income (NOI) would be $180,000 – $9,000 – $40,000 = $131,000. Your Cap Rate would then be $131,000 / $2,000,000 = 6.55%.
What is a "Good" Cap Rate?
A "good" cap rate is relative to the market and the asset class. Generally, lower cap rates (3% – 5%) indicate lower risk and higher-quality properties in "Class A" locations like New York or San Francisco. Higher cap rates (8% – 12%) often indicate higher risk, older buildings, or locations with less economic stability.