Commercial Real Estate Cap Rate Calculator
Calculate your Net Operating Income (NOI) and Capitalization Rate instantly.
What is Cap Rate in Real Estate?
The Capitalization Rate (or Cap Rate) is a fundamental metric used in commercial real estate to indicate the rate of return that is expected to be generated on a real estate investment property. This measure is based on the net income that the property is expected to generate and is calculated by dividing net operating income by property asset value.
The Cap Rate Formula
To calculate the Cap Rate, you need two primary figures: the Net Operating Income (NOI) and the Current Market Value (or Purchase Price) of the property. The formula is as follows:
Cap Rate = (Net Operating Income / Property Value) × 100
Understanding the Components:
- Gross Rental Income: The total potential income if the property is 100% occupied.
- Vacancy Loss: The income lost due to unoccupied units (usually calculated as a percentage).
- Operating Expenses: Costs including property taxes, insurance, maintenance, and management fees (excludes mortgage payments).
- NOI: The final profit after subtracting vacancy and expenses from the gross income.
Real-World Example
Imagine you are looking at a retail strip mall priced at $2,000,000. It generates $250,000 in annual rent. You estimate a 5% vacancy rate and annual operating expenses (taxes, insurance, repairs) of $70,000.
- Effective Gross Income: $250,000 – (5% of $250,000) = $237,500
- Net Operating Income (NOI): $237,500 – $70,000 = $167,500
- Cap Rate: ($167,500 / $2,000,000) × 100 = 8.38%
Why Cap Rate Matters for Investors
Cap rate is an essential tool for comparing similar real estate investments. A higher cap rate generally implies a higher potential return but also higher risk. Conversely, a lower cap rate usually indicates a more stable investment in a "prime" location with lower risk. Most commercial investors look for cap rates between 4% and 10% depending on the asset class and market cycle.