Commercial Real Estate Cap Rate Calculator
Determine the profitability of your investment property instantly.
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What is a Capitalization Rate (Cap Rate)?
The Capitalization Rate, commonly known as the Cap Rate, is one of the most vital metrics used in commercial real estate to evaluate the profitability and return potential of an investment property. It represents the yield of a property over a one-year time horizon assuming the property is purchased with cash.
How to Calculate Cap Rate
The formula for calculating the Cap Rate is straightforward:
Cap Rate = (Net Operating Income / Current Market Value) x 100
Net Operating Income (NOI): This is the total income generated by the property (rent, parking, laundry) minus all necessary operating expenses (property taxes, insurance, maintenance, utilities). Note: NOI does not include mortgage payments or capital expenditures.
Imagine you are looking at a retail strip mall priced at $2,500,000. After reviewing the books, you find the annual rental income is $250,000, but the operating expenses (taxes, insurance, management) total $70,000.
1. Calculate NOI: $250,000 – $70,000 = $180,000.
2. Apply Formula: ($180,000 / $2,500,000) * 100 = 7.2% Cap Rate.
Why the Cap Rate Matters
Cap rates allow investors to quickly compare different properties in the same market. A higher cap rate usually indicates a higher potential return but often comes with higher risk (such as an older building or a less stable neighborhood). Conversely, a lower cap rate suggests a safer investment in a "Class A" location with reliable tenants.
Factors Influencing Cap Rates
- Location: Prime urban centers typically have lower cap rates due to high demand.
- Asset Class: Multi-family, industrial, retail, and office spaces all carry different risk profiles.
- Interest Rates: As interest rates rise, investors typically demand higher cap rates to maintain a spread over the cost of debt.
- Tenant Quality: Properties with long-term leases from "credit tenants" (like national banks or grocery chains) command lower cap rates.