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 widely used metrics in commercial real estate because it lets investors compare opportunities on a consistent basis regardless of financing. A lower cap rate generally reflects a safer, higher-priced property, while a higher cap rate suggests more risk alongside potentially higher returns.
The Cap Rate Formula
Cap rate equals net operating income divided by property value, expressed as a percentage. NOI is your annual rental income minus all operating expenses, before any mortgage payments.
Cap Rate = (NOI / Property Value) × 100
You can also rearrange the formula to solve for property value when you know the market cap rate. Divide NOI by the cap rate to get an estimated value. That is what our property value calculator does.
How to Calculate Cap Rate: Worked Example
A six-unit multifamily building generates $120,000 per year in gross rent. Vacancy runs 5 percent, so effective gross income is $114,000. Annual operating expenses (property taxes, insurance, maintenance, and management at 8 percent of collected rent) total $41,120. That leaves an NOI of $72,880.
The property sold for $1,040,000. Plugging those numbers into the cap rate formula:
NOI = $114,000 - $41,120 = $72,880
Cap Rate = ($72,880 / $1,040,000) × 100 = 7.0%
A 7.0 percent cap rate sits in the value-add range for most markets. Compare that figure to recent comparable sales in the area to judge whether the price reflects fair market value.
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 willing to take.
Cap Rate vs. Cash-on-Cash Return
Cap rate treats the property as if it were purchased for all cash. It ignores financing entirely, which makes it useful for comparing properties independent of how they are funded. Cash-on-cash return measures the income you receive relative to the cash you actually invested after taking out a loan. Use cap rate to screen deals and cash-on-cash to evaluate your leveraged returns. Our return calculator covers both.
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. The calculator above does this for you.
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. A good cap rate is one that fits your return target and risk tolerance.
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. The right cap rate balances return against the risk you are willing to take.
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.