Commercial Real Estate Cap Rate Calculator
Calculate the Capitalization Rate and Net Operating Income (NOI)
Investment Summary
Net Operating Income (NOI):
Capitalization Rate (Cap Rate):
Understanding Capitalization Rate in Real Estate
The Capitalization Rate, commonly known as the Cap Rate, is a fundamental metric used in the commercial real estate industry to indicate the rate of return that is expected to be generated on a real estate investment property.
How to Calculate Cap Rate
The formula for calculating the capitalization rate is straightforward but requires accurate financial data regarding the property's performance:
Key Components of the Calculation
- Gross Operating Income: The total income generated by the property, including rent, parking fees, and laundry facilities, before any expenses.
- Operating Expenses: Costs required to maintain and operate the property, such as property taxes, insurance, utilities, maintenance, and management fees. (Note: This does not include mortgage payments or depreciation).
- Net Operating Income (NOI): The remaining income after all operating expenses have been deducted from the gross income.
Example Calculation
Imagine you are looking at a multi-family apartment building with the following financials:
- Purchase Price: $1,200,000
- Annual Rent: $150,000
- Annual Expenses: $45,000
First, calculate the NOI: $150,000 – $45,000 = $105,000.
Next, divide the NOI by the purchase price: $105,000 / $1,200,000 = 0.0875.
Finally, multiply by 100 to get the percentage: 8.75% Cap Rate.
What is a "Good" Cap Rate?
A "good" cap rate depends on the asset class, location, and current market conditions. Generally, a higher cap rate indicates a higher potential return but also higher risk. Conversely, a lower cap rate (often seen in "Class A" properties in major cities) suggests a safer investment with lower yield potential.