Interest Rate Tables Calculator

Commercial Real Estate Cap Rate Calculator

Calculate your property's Capitalization Rate and potential ROI

Total income minus operating expenses (before taxes and interest).

The total price paid or estimated value of the commercial asset.

Property Capitalization Rate:

0.00%

function calculateCapRate() { var noi = parseFloat(document.getElementById('propNOI').value); var value = parseFloat(document.getElementById('propValue').value); var resultDiv = document.getElementById('capRateResult'); var resVal = document.getElementById('resVal'); var resStatus = document.getElementById('resStatus'); if (isNaN(noi) || isNaN(value) || value <= 0 || noi = 8) { resStatus.innerHTML = 'High yield investment potential.'; resStatus.style.color = '#2f855a'; } else if (capRate >= 5) { resStatus.innerHTML = 'Moderate yield (Typical for stable markets).'; resStatus.style.color = '#2b6cb0'; } else { resStatus.innerHTML = 'Lower yield (Common in premium/high-demand areas).'; resStatus.style.color = '#c05621'; } }

In the world of commercial real estate (CRE), the Cap Rate is one of the most fundamental metrics used by investors to evaluate the profitability and risk of a property. It represents the yield of a property over a one-year time horizon assuming the asset was purchased with cash.

How is Cap Rate Calculated?

The formula for calculating the capitalization rate is straightforward but requires accurate data regarding the property's financial performance:

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

Breaking Down the Components:

• Net Operating Income (NOI): This is the total income generated by the property (rent, parking fees, laundry, etc.) minus all necessary operating expenses. Note: Debt service (mortgage payments) is NOT included in NOI.
• Current Market Value: This is the acquisition cost or the current appraised value of the commercial building.

A Practical Example

Imagine you are looking to purchase a small retail strip mall. The financials are as follows:

• Annual Rental Income: $180,000
• Operating Expenses: $60,000 (Taxes, Insurance, Maintenance)
• Asking Price: $2,000,000

First, calculate the NOI: $180,000 – $60,000 = $120,000.

Next, apply the formula: ($120,000 / $2,000,000) = 0.06 or 6.00% Cap Rate.

What is a "Good" Cap Rate?

A "good" cap rate is subjective and depends heavily on the market, the property type, and the investor's risk tolerance.

• Class A Properties: Located in prime areas (like NYC or London) often have lower cap rates (3% – 5%) because they are considered low-risk.
• Class C Properties: In developing or rural areas, these may have cap rates of 8% – 12% to compensate the investor for the higher risk of vacancy or maintenance issues.

Limitations of the Cap Rate

While useful, the Cap Rate should not be used in isolation. It does not account for leverage (mortgage financing), future capital expenditures, or the time value of money. Investors should also look at the Internal Rate of Return (IRR) and Cash-on-Cash Return for a complete financial picture.