How to Calculate Effective Interest Rate Calculator

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Commercial Real Estate Cap Rate Calculator

Annual income after all operating expenses but before taxes and interest.

Investment Results

Calculated Cap Rate:
Gross Monthly NOI:
10-Year Estimated Income:
function calculateCapRate() { var noi = parseFloat(document.getElementById('noi').value); var value = parseFloat(document.getElementById('propertyValue').value); var resultArea = document.getElementById('resultArea'); if (isNaN(noi) || isNaN(value) || value <= 0) { alert('Please enter valid positive numbers for both fields.'); return; } var capRate = (noi / value) * 100; var monthly = noi / 12; var tenYear = noi * 10; document.getElementById('capRateResult').innerText = capRate.toFixed(2) + '%'; document.getElementById('monthlyNoi').innerText = '$' + monthly.toLocaleString(undefined, {minimumFractionDigits: 2, maximumFractionDigits: 2}); document.getElementById('tenYearIncome').innerText = '$' + tenYear.toLocaleString(); resultArea.style.display = 'block'; }

Understanding the Capitalization (Cap) Rate in CRE

In the world of commercial real estate (CRE), the Capitalization Rate, or "Cap Rate," is a fundamental metric used to compare different investment opportunities. It represents the yield of a property over a one-year time horizon assuming the property is purchased for cash and not debt-financed.

The Cap Rate Formula

The calculation is straightforward but requires accurate data:

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

What is Net Operating Income (NOI)?

To use this calculator effectively, you must understand NOI. NOI is the total income generated by the property (rent, parking fees, laundry) minus all necessary operating expenses. Note: Operating expenses include property management, insurance, utilities, and maintenance, but they do not include mortgage payments (debt service) or income taxes.

Real-World Example

Imagine you are looking at a retail strip mall listed for $2,500,000. After reviewing the financial statements, you see that the property generates $240,000 in annual rent but costs $40,000 a year to maintain and manage. Your NOI is $200,000.

  • NOI: $200,000
  • Value: $2,500,000
  • Calculation: (200,000 / 2,500,000) = 0.08 or 8% Cap Rate

What is a "Good" Cap Rate?

There is no single "correct" number. A "good" cap rate depends on the asset class and location:

  • Class A Office (NYC/London): Often 3% – 4.5% (Low risk, high demand).
  • Class C Industrial: Often 7% – 10% (Higher risk, potentially higher maintenance).
  • Multi-family: Typically 4% – 6% depending on the market.

Generally, a lower cap rate indicates a lower risk profile and higher property value, while a higher cap rate suggests higher potential risk but better immediate cash flow.

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