Commercial Real Estate Cap Rate Calculator
Calculate Net Operating Income (NOI) and Capitalization Rate for investment properties.
Understanding the Commercial Cap Rate
The Capitalization Rate, or "Cap Rate," is one of the most vital metrics in commercial real estate (CRE). It measures the ratio between the Net Operating Income (NOI) produced by an asset and its original capital cost or current market value. Essentially, it tells an investor what their annual return would be on an all-cash purchase.
The Formula for Cap Rate
To calculate the cap rate, you must first determine the Net Operating Income. The formula is:
Cap Rate = (Net Operating Income / Current Market Value) x 100
What is a "Good" Cap Rate?
There is no single "correct" cap rate. Generally, a higher cap rate implies higher potential return but also higher risk. Conversely, a lower cap rate (often seen in primary markets like New York or San Francisco) indicates a safer investment with higher property appreciation potential but lower immediate cash flow.
- 4% – 5%: Typical for "Class A" properties in major metropolitan hubs.
- 6% – 8%: Common for suburban office parks or retail centers.
- 10%+: Often found in distressed properties or rural areas with higher vacancy risks.
How to Calculate Net Operating Income (NOI)
NOI is the foundation of property valuation. To find it, start with your Potential Gross Income (the total rent if 100% occupied). Subtract the Vacancy Loss (unoccupied units and non-payment). This gives you the Effective Gross Income. Finally, subtract Operating Expenses such as property taxes, insurance, maintenance, and management fees. Important: Do not include mortgage interest or depreciation in NOI, as these are specific to the owner, not the property itself.
Example Calculation
Imagine you are looking at a multi-family apartment building listed for $2,000,000.
- Gross Annual Rent: $200,000
- Vacancy (5%): $10,000
- Operating Expenses: $60,000
First, calculate NOI: $200,000 – $10,000 – $60,000 = $130,000.
Next, calculate Cap Rate: ($130,000 / $2,000,000) = 0.065 or 6.5%.
Why Investors Use This Calculator
Our Commercial Real Estate Cap Rate Calculator allows you to quickly compare different investment opportunities. By adjusting the vacancy rates and expense estimates, you can perform a sensitivity analysis to see how the property performs under "worst-case" scenarios. This ensures you never overpay for a commercial asset based on inflated income projections.