Per Month Interest Rate Calculator

Commercial Real Estate Cap Rate Calculator

function calculateCapRate() { var price = parseFloat(document.getElementById('purchasePrice').value); var gross = parseFloat(document.getElementById('grossIncome').value); var expenses = parseFloat(document.getElementById('operatingExpenses').value); var vacancy = parseFloat(document.getElementById('vacancyRate').value); if (isNaN(price) || isNaN(gross) || isNaN(expenses) || price <= 0) { alert("Please enter valid positive numbers for price, income, and expenses."); return; } if (isNaN(vacancy)) vacancy = 0; var effectiveGrossIncome = gross * (1 – (vacancy / 100)); var noi = effectiveGrossIncome – expenses; var capRate = (noi / price) * 100; document.getElementById('resNOI').innerText = "$" + noi.toLocaleString(undefined, {minimumFractionDigits: 2, maximumFractionDigits: 2}); document.getElementById('resCapRate').innerText = capRate.toFixed(2) + "%"; document.getElementById('results').style.display = 'block'; }

---

Understanding the Capitalization Rate (Cap Rate) in Real Estate

In commercial real estate, the Capitalization Rate (or Cap Rate) is the most fundamental metric used to compare the profitability and return potential of different investment properties. It represents the yield of a property over a one-year time horizon assuming the asset is purchased for cash and not mortgaged.

How to Calculate Cap Rate

The formula for calculating the Cap Rate is straightforward:

Cap Rate = (Net Operating Income / Current Market Value) × 100

What is Net Operating Income (NOI)?

NOI is the total income generated by a property after deducting all necessary operating expenses. To find a realistic NOI, you must account for:

• Gross Potential Rent: Total possible rent if 100% occupied.
• Vacancy Loss: Estimated loss from empty units or non-payment.
• Operating Expenses: Property taxes, insurance, maintenance, utilities, and management fees (Note: Interest payments and depreciation are NOT included in NOI).

Example Calculation

Imagine you are looking at an office building with the following financials:

• Purchase Price: $2,000,000
• Gross Annual Income: $250,000
• Vacancy Rate: 5% ($12,500)
• Annual Expenses: $80,000

Step 1: Calculate NOI
$250,000 (Gross) – $12,500 (Vacancy) – $80,000 (Expenses) = $157,500 (NOI)

Step 2: Calculate Cap Rate
($157,500 / $2,000,000) × 100 = 7.88%

What is a "Good" Cap Rate?

A "good" cap rate is subjective and depends on the asset class (Retail, Industrial, Multifamily), location, and current market conditions. Generally, a higher cap rate (8% – 12%) indicates higher potential return but also higher risk. A lower cap rate (3% – 5%) often represents a safer, "trophy" asset in a primary market like New York City or San Francisco.

Investors use this calculator to quickly filter properties. If similar buildings in an area are trading at a 6% cap rate, but a property is listed at a 4% cap rate, it may be overpriced relative to its income potential.