Commercial Real Estate Calculator – Loan Payments, Cap Rate, Cash-on-Cash, DSCR

Introduction

Investing in commercial real estate involves balancing financing costs against property income. Before committing funds, an investor must understand how monthly mortgage payments affect cash flow, what cap rate reflects property yield, and how debt service coverage ratio (DSCR) indicates risk. This guide explains each key metric—mortgage payment, cap rate, cash-on-cash return, DSCR, and an estimate of internal rate of return (IRR)—and walks through their formulas. Use the calculator above to input your purchase price, loan details, net operating income (NOI), and equity, then compare results to typical market benchmarks.

Loan Amortization & Mortgage Payment

Commercial loans are typically amortized over 15 to 25 years, meaning each monthly payment covers both principal and interest. The formula for a fixed-rate amortized loan is:

M = (L × i) / [1 − (1 + i)^(-n)]

Where:

• M = monthly mortgage payment
• L = loan principal (amount borrowed)
• i = monthly interest rate (annual rate ÷ 12)
• n = total number of payments (loan term in years × 12)

For example, a $800,000 loan at 5% annual interest over 20 years has a monthly rate of 0.05/12 ≈ 0.004167 and n = 240. Plugging into the formula yields the monthly payment. That payment becomes a fixed annual debt service—mortgage × 12.

Cap Rate Explained

The capitalization rate, or cap rate, measures property yield independent of financing. It is defined as:

Cap Rate (%) = (NOI / Purchase Price) × 100

Net Operating Income (NOI) equals gross rental income minus operating expenses (property taxes, insurance, maintenance, management fees, etc.). If a building costs $1,000,000 and generates $120,000 NOI annually, the cap rate is 12%. A higher cap rate indicates higher income relative to cost—but often comes with increased risk, such as in markets with lower occupancy rates or older properties.

Cash-on-Cash Return

Cash-on-cash return compares the annual pre-tax cash flow after debt service to the investor’s initial equity. It is calculated as:

Cash-on-Cash (%) = [(NOI − Annual Debt Service) / Equity Invested] × 100

Suppose the property’s NOI is $120,000 and annual mortgage payments total $63,000; the equity invested is $200,000. The pre-tax cash flow is $120,000 − $63,000 = $57,000. Dividing by $200,000 yields 28.5%. This metric helps investors compare returns on cash across different types of investments, since it ignores loan paydown and assumes cash flow remains stable.

Debt Service Coverage Ratio (DSCR)

DSCR indicates how many times the property’s income covers debt payments. Lenders typically require a minimum DSCR, often 1.25, to ensure a cushion for unexpected vacancies or expense spikes. It is calculated as:

DSCR = NOI / Annual Debt Service

Using the example above, $120,000 NOI divided by $63,000 debt service = 1.90. A DSCR of 1.90 means the property generates 1.9 times the cash needed for debt, offering significant buffer. Properties with DSCR below 1.0 fail to cover debt service from operations alone, forcing investors to use other funds to pay loans.

Estimating Internal Rate of Return (IRR)

While cap rate and cash-on-cash return focus on current income, IRR reflects total investment performance over time, including sale proceeds. A simplified estimate assumes the property is held for a fixed period, such as five years, with steady NOI and a sale at the same cap rate. Suppose NOI grows by 2% per year and sale price is NOI in year five divided by the current cap rate. Calculating IRR requires finding the discount rate that equates net present value (NPV) of cash flows (annual net cash and sale proceeds) to zero. In practice, use financial software or a dedicated IRR calculator for accuracy.

Example scenario:

• Year 1–5 NOI: $120,000, then growing 2% annually.
• Annual debt payments: $63,000 constant.
• Net cash flow each year: NOI minus debt service.
• Sale price in year 5: Year 5 NOI ÷ Cap rate (e.g., $129,200 ÷ 0.12 ≈ $1,076,667).
• Investors input these cash flows into an IRR function to find annualized return.

That IRR might approximate 15–18%, depending on timing and growth assumptions. Exact figures require detailed underwriting.

Market Considerations & Risk Factors

Beyond numbers, successful deals depend on market dynamics. Key factors include:

• Location: Properties in gateway cities (e.g., New York, Los Angeles) often trade at lower cap rates (4–6%) due to lower perceived risk, whereas secondary markets (e.g., Midwest cities) may offer 7–9% cap rates with higher vacancy risks.
• Tenant Quality: Long-term leases with creditworthy tenants (e.g., national chains) provide stable NOI. Short-term leases or speculative developments carry greater vacancy risk.
• Financing Environment: Interest rate fluctuations affect loan costs. A 1% increase in the interest rate can reduce cash-on-cash returns by several percentage points and tighten DSCR.
• Operating Expenses: Changes in property taxes, insurance, or utilities can alter NOI. Always stress-test projections with variable expense scenarios to gauge sensitivity.

How to Use This Calculator

1. Enter the purchase price and loan amount. If you put down 20% equity, the loan amount equals 80% of the purchase price.
2. Provide the annual interest rate—commercial mortgages often have rates between 4% and 6%—and the loan term in years, typically 15–25 years.
3. Input the net operating income (NOI). This is your total rental revenue minus operating expenses (excluding debt service).
4. Enter the equity you plan to invest out of pocket. The calculator uses this to compute cash-on-cash return.
5. Click “Calculate Metrics.” The tool will display:
   • Monthly mortgage payment (principal + interest).
   • Cap rate, indicating yield at purchase price.
   • Cash-on-cash return on equity invested.
   • Debt service coverage ratio (DSCR).
6. Use the Print or Download buttons to save the results for your records, or Share to copy the values for email or messaging.

Common Pitfalls & Tips

• Overestimating NOI: Ensure your income projections account for realistic vacancy rates and conservative rent growth. Overly optimistic assumptions inflate cap rate and cash-on-cash estimates.
• Underestimating Expenses: Include line items such as replacement reserves, property management fees, and maintenance. Skipping these reduces net cash flow projections.
• Ignoring Loan Fees: Origination fees, appraisal costs, and closing expenses reduce initial cash flow or increase equity requirements. Factor these into your total cash outlay.
• Failing to Stress-Test: Model scenarios where interest rates rise by 1–2 percentage points or NOI declines by 5–10%. This helps you understand downside risk and maintain adequate DSCR.
• Timing of Sale: If you plan to sell in five years, consider market cycles. A cyclical downturn can shrink property values, reducing IRR and equity returns.

Frequently Asked Questions

What cap rate should I target?

Cap rates vary by property type and location. Class A office buildings in prime markets might trade at 4–5%, while Class B hotels in secondary markets might go for 8–10%. Research comparable sales to determine a realistic target.

How much equity is recommended?

Most lenders require a minimum of 20–25% equity. Putting down 25–30% can improve loan terms and lower mortgage insurance costs. More equity reduces leverage and monthly payments but also reduces potential returns on equity.

What DSCR is acceptable?

Lenders often require a DSCR of at least 1.25. This means NOI must be 25% higher than debt service. A DSCR closer to 2.0 offers more comfort, but higher DSCR typically corresponds to lower leverage and potentially lower returns.

How do I estimate IRR accurately?

Use detailed cash-flow projections including rent escalations, expense growth, and final sale proceeds. Plug these cash flows into a financial calculator or spreadsheet IRR function. A simple five-year hold model can provide a reasonable estimate, but adjust for market timing and cap rate changes.

Explore more tools

Visit CalculatorUSAApp for additional calculators, including:

• Rental Property ROI Calculator
• Mortgage Amortization Schedule Generator
• Loan vs. Cash Purchase Comparison
• Property Tax & Insurance Estimator

Authoritative Sources

Learn more about cap rates at Investopedia: Capitalization Rate and about DSCR in commercial lending at Investopedia: DSCR.

Disclaimer

This calculator provides estimates for informational purposes only. It does not constitute financial advice. Always consult a commercial mortgage broker or financial advisor for personalized guidance.