Commercial Real Estate Cap Rate Calculator
Investment Summary
Net Operating Income (NOI)
$0
Capitalization Rate
0%
Understanding the Capitalization Rate (Cap Rate)
In commercial real estate, the Cap Rate is the most critical metric used to assess 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 in cash.
The Cap Rate Formula
To calculate the Cap Rate, we use the following mathematical formula:
Cap Rate = (Net Operating Income / Current Market Value) x 100
Key Components Explained
- Net Operating Income (NOI): This is your total income (rent + fees) minus all necessary operating expenses. Note: NOI does not include mortgage payments or capital expenditures.
- Gross Potential Income: The total possible income if the property were 100% occupied.
- Operating Expenses: These include property taxes, insurance, maintenance, property management fees, and utilities.
- Vacancy Factor: Real estate is rarely 100% occupied forever. Calculating with a 5-10% vacancy rate provides a more realistic financial outlook.
What is a "Good" Cap Rate?
A "good" cap rate depends on the market, property type, and economic conditions. Generally:
- 4% – 5%: Common in "Primary Markets" (like NYC or San Francisco) for high-quality assets. Lower risk, lower return.
- 6% – 8%: Typical for "Secondary Markets" or suburban office/retail spaces.
- 10%+: Often found in "Tertiary Markets" or high-risk properties (Class C/D). Higher risk, higher potential return.
Real-World Example
Imagine you are looking at a small retail strip valued at $2,000,000. It generates $180,000 in annual rent. After paying $60,000 in taxes, insurance, and repairs, your NOI is $120,000.
Calculation: ($120,000 / $2,000,000) = 0.06 or 6% Cap Rate.