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Cap Rate Calculator
This helpful commercial real estate calculator can determine any property's capitalization rate, given two figures.
Cap Rate Calculator
Use the calculator below to figure out the cap rate for any property. Need a clearer picture on how the calculation works? Read on below.
What Is a Cap Rate?
A cap rate, or capitalization rate, is a measure in commercial real estate that represents the return on an investment over a specified time period — usually one year — that is expected from an income-generating investment property. Cap rates can be easily calculated by dividing the property’s net operating income by its market value. Once calculated, the cap rate is expressed as a percentage.
Appraisers often scrutinize property cap rates to determine commercial property values, and it is the key metric behind the income capitalization approach to property valuation.
Calculating Your Cap Rate
In order to get a clearer picture on how to calculate a cap rate, imagine a property with a NOI of $500,000 and a market value of $10 million. This property would have a capitalization rate of 5.0%, calculated below.
Cap Rate Formula
Cap Rate = Net Operating Income ÷ Current Market Value
In our example, the NOI of $500,000, divided by the market value of $10 million, results in a cap rate of 5.0%.
Understanding and Utilizing Cap Rates
Cap rates serve as a way to identify the length of time it will take an investor to recover its investment in an asset. For example, a property that has a cap rate of 10% could reasonably be expected to generate enough income to recoup the investor’s stake in the property in 10 years. Additionally, the relationship between a property’s NOI and cap rate can be used to determine the property value when taken in comparison with the cap rates of similar properties — that is, commercial properties of similar age and asset class — in a given market.
A property’s capitalization rate can be useful in making rough comparisons to the relative value of similar properties on the market. However, it should not be taken as the sole indicator of an investment property’s profitability. This is because the calculation disregards certain key factors such as leverage.
What Is a Good Capitalization Rate for a Rental Property?
Capitalization rates are based on projected estimates of future income. This means that cap rates are subjective.
A good cap rate for one investor may not be acceptable to another. Similarly, for multifamily and HUD loans, there aren't any industry-specific cap rate ranges.
Variances in cap rates are all about investment risk. There are a variety of different cap rates among different properties, and different markets also have different ranges. One of the best ways to find what a typical cap rate range for an asset is to check one of any number of cap rate surveys for your market and asset type.
As cap rates indicate risk, you can usually assume that a higher cap rate means a property has a higher NOI and a lower valuation, along with a higher risk profile. While an investment with a lower cap rate has a lower NOI relative to its market value, the risk is similarly reduced.