Commercial Real Estate Cap Rate & NOI Calculator
Calculate your Net Operating Income (NOI) and Capitalization Rate instantly.
Understanding Cap Rate and NOI in Commercial Real Estate
In the world of commercial real estate (CRE) investing, two metrics reign supreme: Net Operating Income (NOI) and the Capitalization Rate (Cap Rate). These figures provide a standardized way to evaluate the profitability of a property regardless of how it is financed.
What is Net Operating Income (NOI)?
NOI is the total income generated by a property after all necessary operating expenses have been deducted. It excludes debt service (mortgage payments), depreciation, and income taxes. To calculate NOI, you start with the Gross Rental Income, subtract the vacancy losses (the income lost when units are empty), and then subtract operating expenses like property taxes, insurance, maintenance, and property management fees.
How the Cap Rate Works
The Cap Rate is a percentage that indicates the expected rate of return on a real estate investment property. It is calculated by dividing the NOI by the purchase price (or current market value).
Formula: Cap Rate = (NOI / Purchase Price) x 100
A "good" cap rate depends on the market and the asset class. Generally, a higher cap rate implies a higher potential return but also higher risk. Conversely, a lower cap rate (often found in "Class A" properties in major cities) suggests a safer investment with more stable, albeit lower, returns.
Practical Example
Imagine you are looking at a small office building priced at $1,500,000.
- Gross Income: $180,000 per year.
- Vacancy (7%): $12,600.
- Operating Expenses: $45,000 (Taxes, Utilities, Repairs).
Next, find the NOI: $167,400 – $45,000 = $122,400.
Finally, the Cap Rate: ($122,400 / $1,500,000) = 8.16%.