Determine the potential return on your investment property instantly.
Calculated Cap Rate
0%
What is a Cap Rate in Commercial Real Estate?
The Capitalization Rate, or "Cap Rate," is one of the most critical 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 the Cap Rate Formula Works
The formula for calculating Cap Rate is straightforward but relies on accurate financial data:
Cap Rate = (Net Operating Income / Current Market Value) × 100
Key Components:
Net Operating Income (NOI): This is the total income generated by the property (rent, parking fees, laundry) minus all necessary operating expenses (property taxes, insurance, maintenance, utilities, management fees). Note: Mortgage payments and interest are NOT included in NOI.
Current Market Value: This is the purchase price or the current appraised value of the commercial asset.
Why Cap Rates Matter for Investors
Investors use cap rates to compare different investment opportunities quickly. A higher cap rate generally implies a higher potential return but also suggests higher risk. Conversely, a lower cap rate typically indicates a safer investment in a "core" location (like a Tier 1 city center) with lower potential for sudden vacancy but slower immediate yield.
Real-World Example
Imagine you are looking at a retail strip mall priced at $2,500,000. After reviewing the books, you find that the annual rental income is $200,000 and the annual operating expenses (taxes, repairs, etc.) are $50,000.
NOI: $200,000 – $50,000 = $150,000
Value: $2,500,000
Calculation: ($150,000 / $2,500,000) = 0.06 or 6.00% Cap Rate
What is a "Good" Cap Rate?
There is no single "perfect" cap rate. In high-demand markets like New York or San Francisco, cap rates might hover between 3% and 5%. In growing secondary markets or for riskier asset classes like older industrial spaces, you might see cap rates between 7% and 10%.
function calculateCapRate() {
var noiInput = document.getElementById('noi');
var valueInput = document.getElementById('propertyValue');
var resultDiv = document.getElementById('creResult');
var capDisplay = document.getElementById('capDisplay');
var interp = document.getElementById('creInterpretation');
var noi = parseFloat(noiInput.value);
var value = parseFloat(valueInput.value);
if (isNaN(noi) || isNaN(value)) {
alert("Please enter valid numeric values for both fields.");
return;
}
if (value <= 0) {
alert("Property value must be greater than zero.");
return;
}
var capRate = (noi / value) * 100;
resultDiv.style.display = "block";
capDisplay.innerHTML = capRate.toFixed(2) + "%";
var interpretationText = "";
if (capRate < 4) {
interpretationText = "This is a Low Cap Rate. Typically found in 'Class A' properties in premium locations. Low risk, but lower immediate yield.";
} else if (capRate >= 4 && capRate <= 7) {
interpretationText = "This is a Market Average Cap Rate. Common for stabilized assets in healthy economic areas.";
} else {
interpretationText = "This is a High Cap Rate. Indicates higher potential returns, but may carry higher risk, higher vacancy, or be located in a declining market.";
}
interp.innerHTML = interpretationText;
// Smooth scroll to result on mobile
resultDiv.scrollIntoView({ behavior: 'smooth', block: 'nearest' });
}