Commercial Real Estate Cap Rate Calculator
Calculate your property's Capitalization Rate and Estimated Market Value.
Understanding Cap Rate in Commercial Real Estate
In the world of commercial real estate (CRE), the Capitalization Rate, or "Cap Rate," is arguably the most critical metric for evaluating the profitability and return potential of an investment property. This calculator helps investors quickly determine the relationship between income and value.
What is Cap Rate?
The Cap Rate represents the yield of a property over a one-year time horizon assuming the property is purchased for cash. It is calculated by dividing the Net Operating Income (NOI) by the current market value or purchase price.
The Formula:
Cap Rate = (Net Operating Income / Current Market Value) x 100
Key Components of the Calculation
- Net Operating Income (NOI): This is the total annual income generated by the property (rent, parking, laundry) minus all necessary operating expenses (property taxes, insurance, maintenance, utilities). It does not include mortgage payments or capital expenditures.
- Purchase Price/Market Value: The amount paid for the asset or its current appraised value in the open market.
- Market Cap Rate: The average cap rate for similar properties in the same geographic area and asset class (e.g., multi-family, retail, industrial).
Example Calculation
Imagine you are looking at a small office building with an Annual NOI of $120,000. The seller is asking for $1,500,000.
Using the formula: $120,000 / $1,500,000 = 0.08 or 8.0% Cap Rate.
If the local market average for office buildings is 6.5%, this property might be considered a "high yield" investment or potentially carries more risk, as investors are demanding a higher return for that specific asset.
Why Market Cap Rate Matters
While the current cap rate tells you what you are earning, the Market Cap Rate tells you what the property should be worth. If your property generates $100,000 in NOI and the market cap rate is 5%, the estimated value is $2,000,000 ($100,000 / 0.05). If the market cap rate shifts to 6%, that same $100,000 in income is now only worth $1,666,667. This shows how sensitive property values are to market sentiment and interest rates.