Commercial Real Estate Cap Rate Calculator

Introduction

The capitalization rate, or cap rate, is a key metric for commercial real estate investors. It represents the ratio of net operating income (NOI) to property value, expressed as a percentage. A higher cap rate may indicate higher risk or potential return, while a lower cap rate often reflects a pricier, lower-yield investment. Use this calculator to determine your property’s cap rate by entering your annual NOI and the current market value of the asset.

How to Use

1. Enter the annual Net Operating Income (NOI), which is your gross rental income minus operating expenses (excluding debt service).
2. Input the Property Value, representing the market price or purchase price of the asset.
3. Click Calculate Cap Rate to see the percentage ratio of NOI to value.

Calculation Formula

The cap rate calculation is straightforward:

Cap Rate (%) = (NOI ÷ Property Value) × 100

Practical Applications

• Investment Comparison: Compare cap rates across properties to gauge relative value and risk.
• Market Analysis: Understand local market trends by examining average cap rates.
• Due Diligence: Validate seller-provided numbers during property evaluation.

Frequently Asked Questions

1. What is NOI?

Noi is your gross rental income minus all operating expenses, such as taxes, insurance, maintenance, and management fees, but before financing costs.

2. How do I determine property value?

Use the latest appraised value, recent sale price, or market comparables (comps).

3. Is a higher cap rate always better?

Not necessarily; higher cap rates often come with higher risk, while lower rates may indicate stable, high-demand properties.

4. Can cap rate change over time?

Yes. Changes in income or property value will affect the cap rate, so recalculate when circumstances change.

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6. Disclaimer

This calculator provides estimates for informational purposes. Consult a real estate professional for investment decisions.