Cap Rate Calculator
Calculate the capitalization rate on any commercial property using NOI and property value.
Use this free calculator from CapitalAx Commercial Lending to analyze your commercial financing scenario. For personalized guidance on your specific deal, request a quote or call our team.
What is a Cap Rate?
The capitalization rate, or cap rate, is the ratio of a property's annual net operating income to its market value. It is one of the most common metrics investors use to compare commercial real estate opportunities. A lower cap rate generally points to a safer, more expensive property, while a higher cap rate suggests more risk but potentially higher returns.
How to Calculate Cap Rate
Cap rate equals net operating income divided by property value, expressed as a percentage. Net operating income is your annual rental income minus operating expenses, before debt payments. For example, a property with $200,000 in NOI and a $2,500,000 value carries an 8 percent cap rate. To work backward from a target cap rate to a value, use our property value calculator.
What Is a Good Cap Rate?
There is no single right number. Stabilized properties in strong markets often trade between 4 and 7 percent. Value add deals and properties in secondary markets can run 7 to 10 percent or more. The right cap rate is the one that matches your return target and the level of risk you are comfortable taking on.
Frequently Asked Questions
What is a cap rate?
The capitalization rate is the ratio of a property's annual net operating income to its market value, shown as a percentage. Investors use it to compare commercial real estate opportunities and gauge the return a property produces relative to its price.
How do you calculate cap rate?
Divide annual net operating income by the property value, then multiply by 100. For example, a property with $200,000 in NOI and a $2,500,000 value has an 8 percent cap rate.
What is a good cap rate for commercial real estate?
It depends on the property type, location, and risk. Stabilized properties in strong markets often trade between 4 and 7 percent, while value add deals and secondary markets can run 7 to 10 percent or higher.
Does a higher cap rate mean a better investment?
Not always. A higher cap rate usually signals higher risk, such as a weaker location, deferred maintenance, or vacancy. A lower cap rate reflects a safer, more in demand property.
What is the difference between cap rate and cash on cash return?
Cap rate measures return based on the full property value and ignores financing. Cash on cash return measures the cash income you earn relative to the actual cash you invested, so it accounts for your loan and down payment.