Cap Rate Calculator
Find the capitalization rate for any commercial property — or work backward to find your maximum purchase price.
Cap Rate Calculator
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NOI = Effective Gross Income (EGI) minus operating expenses (property tax, insurance, maintenance, management), before loan payments and income taxes.
Calculation Summary
What Is Cap Rate and Why It Matters
Cap rate (capitalization rate) is the most common shorthand investors use to compare commercial properties at a glance. It tells you the annual return a property would generate if you bought it in all cash, based purely on its net operating income relative to the purchase price. It's not a complete picture of your actual return — it ignores financing, taxes, and future appreciation — but it's the fastest way to compare two properties or sanity-check a listing price against the market.
The Formula
Cap Rate = Net Operating Income (NOI) / Purchase Price × 100%Worked Example 1: 32-Unit Suburban Garden Apartment Property
Consider a 32-unit Class B garden apartment acquisition in a growing secondary metropolitan submarket:
- Purchase price: $3,850,000
- Stabilized Net Operating Income (NOI): $269,500 (see our NOI calculation methodology and T-12 normalization)
Calculation: Cap Rate = $269,500 (NOI) ÷ $3,850,000 (Purchase Price) = 7.00%
The 7.00% represents your unleveraged cash yield if acquired for 100% cash. Sizing a 65% LTV commercial bank loan ($2,502,500 senior debt, $1,347,500 equity check) at 6.25% fixed interest generates positive financial leverage (7.00% Cap Rate > 6.25% debt rate). During an initial 3-year interest-only (IO) period ($156,406 annual debt service), pre-tax cash flow is $113,094, producing an 8.39% (~8.4%) Cash-on-Cash return. Upon transitioning to standard 25-year amortization ($198,099 annual debt service), annual cash flow is $71,401 (5.30% Cash-on-Cash), which combines with $42,908 in first-year principal paydown to deliver an 8.48% total return on equity before taxes. Model both phases in our Cash-on-Cash Return Calculator or full Deal Analyzer Tool to stress-test your leveraged debt coverage under higher vacancy.
Worked Example 2: 12,500 Sq Ft Neighborhood Retail Strip Center
To understand cross-sector yield spreads, evaluate a 4-tenant corner retail strip center acquired for $2,200,000 (featuring a coffee shop, dry cleaner, and pharmacy):
- Contract purchase price: $2,200,000
- Effective Gross Income (EGI): $238,000 | In-Place Stabilized NOI after $73,000 OpEx: $165,000
Calculation: Cap Rate = $165,000 (NOI) ÷ $2,200,000 (Purchase Price) = 7.50%
Comparative Takeaway: The retail center’s 7.50% Cap Rate reflects a 50 bps yield premium over the 7.00% multifamily example. This spread compensates investors for commercial lease rollover risk, longer re-tenanting downtime, and tenant improvement (TI) capital allowances.
How to Interpret Your Cap Rate Result (Underwriting Guidelines)
A cap rate is neither universally "good" nor "bad"; it represents the unleveraged pricing equilibrium between risk and reward. Professional underwriters interpret the output across three institutional benchmarks:
Compare your cap rate against prevailing mortgage interest rates. Positive leverage occurs when the property cap rate exceeds your borrowing cost, increasing equity cash-on-cash yield. Negative leverage occurs when borrowing costs exceed property yields.
Institutional capital monitors the historical yield spread between commercial cap rates and the 10-Year U.S. Treasury. A healthy risk premium is typically 200 to 300 basis points (bps) to compensate for illiquidity, leasing downtime, and capital risk.
Gateway Class A core properties (4.5%–5.5%) prioritize stability and capital preservation. Suburban Class B and tertiary value-add properties (6.5%–8.5%+) deliver higher nominal cash flow but require active asset management.
To compare your calculated cap rate against current institutional ranges across multifamily, industrial, retail, office, self-storage, hotel, and single-tenant NNN properties, visit our National Cap Rate Benchmarks Master Reference Table.
Valuation Mechanics: Expected Growth (r − g) & Terminal Exit Expansion
In modern institutional real estate finance, the capitalization rate is far more than a static division of in-place cash flows; it represents the perpetual mathematical simplification of a discounted cash flow (DCF) model, expressed through the fundamental relationship: Cap Rate = r − g. Here, r represents the investor’s required unleveraged total rate of return (discount rate or hurdle IRR), while g represents the expected compound annual growth rate of the property’s Net Operating Income.
This fundamental relationship explains why pricing yields diverge dramatically across asset classes and geographic tiers. In high-growth metropolitan markets experiencing strong corporate in-migration and population growth (such as Austin, Phoenix, or prime Miami submarkets), Class A multifamily properties frequently trade at compressed cap rates of 4.50% to 5.25%. Buyers willingly accept lower in-place cash yields because they underwrite an annual rent growth rate of g = 3.5%, which compounds to deliver an 8.0% to 8.75% unleveraged total return. Conversely, in mature rustbelt or tertiary retail markets where rent growth is constrained (g ≈ 0.5%), institutional buyers demand an in-place cap rate of 7.50% to 8.50% to clear their capital return hurdles.
Professional Underwriting Best Practice: Terminal Exit Cap Rate Expansion. When modeling a 5-to-10-year investment holding period, the most perilous pro-forma assumption is modeling exit valuation at the same (or lower) cap rate as acquisition. Institutional underwriters universally apply a conservative terminal cap rate expansion of +5 to +10 basis points per holding year (for example, acquiring an asset at a 7.00% entry cap rate and underwriting disposition at 7.25% to 7.50% at Year 5). This disciplined cushion insulates the deal against structural physical depreciation, rising tenant improvement costs as the asset ages, and unpredictable macroeconomic interest rate fluctuations upon exit.
Common Cap Rate Pitfalls & Limitations
1. Ignores Financing: Cap rate is an unleveraged metric. It does not reflect mortgage interest rates, amortization, or leveraged returns. Always evaluate Alongside Cash-on-Cash Return and DSCR.
2. Pro-Forma vs. In-Place T12: Broker listing packages often use aggressive pro-forma assumptions. Always underwrite based on audited trailing 12-month (T12) operating statements.
Frequently Asked Questions
What's a good cap rate for commercial real estate?
It depends heavily on asset class and location. Multifamily in a strong metro might trade at 4-5%, while a single-tenant net-lease property in a secondary market might trade at 7-9%. Lower cap rates generally signal lower perceived risk (and lower yield); higher cap rates signal higher risk or yield.
What's the difference between cap rate and cash-on-cash return?
Cap rate assumes an all-cash purchase and ignores your financing. Cash-on-cash return accounts for your actual cash invested (after a loan), so it reflects your real leveraged return.
Does cap rate account for financing?
No. Cap rate is calculated independent of how the deal is financed, which is exactly why it's useful for comparing properties apples-to-apples — regardless of each buyer's loan terms.
Can I use cap rate to value a property I already own?
Yes — plug in your property's current NOI and an estimated market value (or ask a broker for comparable sales) to see roughly where your cap rate sits relative to the market.
Property-Type Cap Rate Calculators & Underwriting Scenarios
Operating expense ratios, vacancy assumptions, and capital reserve requirements vary significantly across commercial sectors. Explore specialized asset-class scenarios:
Cap Rate Underwriting Reference Guide
Explore illustrative capitalization rate modeling ranges across property types and metropolitan market tiers.
Need Cap Rate, NOI, DSCR, and Cash-on-Cash all together?
Use the Deal Analyzer tool to run all core CRE metrics from a single set of inputs with stress testing.