Commercial Property Cap Rate Calculator
Calculate the Capitalization Rate to evaluate investment potential.
What is a Cap Rate in Commercial Real Estate?
The Capitalization Rate, or "Cap Rate," is a fundamental metric used by real estate investors to compare different commercial properties. It represents the estimated annual rate of return an investor expects to earn on a property, assuming the purchase is made in cash (no financing).
The Cap Rate Formula
The calculation is straightforward but relies on accurate data regarding the property's income and expenses:
Cap Rate = (Net Operating Income / Current Market Value) × 100
How to Calculate Cap Rate: Step-by-Step
- Step 1: Determine Gross Income: Sum up all annual rent payments and additional revenue sources (vending machines, parking fees, storage units).
- Step 2: Subtract Operating Expenses: Include property taxes, insurance, maintenance, property management fees, and utilities. Do not include mortgage payments or capital expenditures (major renovations).
- Step 3: Calculate Net Operating Income (NOI): Subtract the expenses from the gross income.
- Step 4: Divide by Value: Divide the NOI by the property's current market value or purchase price.
Example Calculation
Imagine a retail building with the following financials:
- Gross Income: $100,000
- Operating Expenses: $30,000
- Purchase Price: $1,000,000
First, find the NOI: $100,000 – $30,000 = $70,000.
Next, divide by the price: $70,000 / $1,000,000 = 0.07.
Multiply by 100 to get the percentage: 7.00% Cap Rate.
Why Cap Rate Matters
Cap rates provide a "snapshot" of a property's risk and return profile. Higher cap rates generally indicate higher potential returns but also higher risk (often found in older buildings or less stable neighborhoods). Lower cap rates usually suggest lower risk and higher-quality assets (Class A office buildings in major metropolitan areas).