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⚡ Quick answer

To calculate the Cap Rate, divide the Net Operating Income (NOI) by the property value: Cap Rate = NOI ÷ Property Value.

Cap Rate

NOI divided by property value—commercial real estate yield shorthand.

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📖 What it is

The Cap Rate, or capitalization rate, is a crucial metric in commercial real estate that provides a quick snapshot of an investment's potential return. It is calculated by dividing the Net Operating Income (NOI) by the property value, offering investors a shorthand to gauge property yield.

To use this calculator, you need two key inputs: the Net Operating Income (NOI) of the property and its current market value. The output will be the cap rate expressed as a percentage, which simplifies the assessment of investment viability.

Keep in mind that this tool assumes you have accurate and reliable figures for NOI and property value. It's not advisable to rely solely on this calculation without considering market conditions, property-specific risks, or other financial metrics.

How to use

  1. Determine the Net Operating Income (NOI) of the property.
  2. Find the current property value.
  3. Use the formula: Cap Rate = NOI ÷ Property Value.
  4. Multiply the result by 100 to get a percentage.
  5. Interpret the cap rate to assess investment potential.

📐 Formulas

  • Cap Rate Formula—Cap Rate = NOI ÷ Property Value
  • Yield Percentage—Cap Rate (%) = (Cap Rate × 100)

💡 Example

To calculate the cap rate:

1. Given: NOI = $120,000 and Property Value = $2,000,000.

2. Apply the formula: Cap Rate = $120,000 ÷ $2,000,000.

3. This results in a cap rate of 0.06 or 6%.

Real-life examples

  • Office Building Investment

    NOI = $120,000, Property Value = $2,000,000. Cap Rate = 6%.

  • Retail Space Analysis

    NOI = $80,000, Property Value = $1,600,000. Cap Rate = 5%.

Scenario comparison

  • High Cap Rate—Indicates a potentially higher yield but may suggest higher risk or lower property quality.
  • Low Cap Rate—Suggests a lower yield, often associated with higher-quality properties in prime locations.

Common use cases

  • Evaluating potential commercial real estate investments.
  • Comparing different properties for purchase.
  • Assessing property performance over time.
  • Determining appropriate pricing for selling a property.
  • Making informed decisions on property management strategies.

How it works

The cap rate is determined by dividing the net operating income (NOI) by the total property value, providing insight into the expected return on investment in real estate.

What it checks

This tool checks the yield of a commercial real estate investment by calculating the cap rate from NOI and property value.

Signals & criteria

  • NOI
  • Value

Typical errors to avoid

  • Pro forma NOI inflation.
  • Wrong value basis.
  • Capex reserves omitted.

Decision guidance

Low: A low cap rate may indicate a less desirable investment with lower returns.
Medium: A medium cap rate suggests a balanced investment with reasonable risk and return.
High: A high cap rate typically indicates a more lucrative but potentially riskier investment opportunity.

Trust workflow

Recommended steps after getting a result:

  1. Verify your NOI calculations for accuracy.
  2. Ensure the property value is based on recent market data.
  3. Consider external factors affecting the real estate market.

FAQ

FAQ

  • vs cash-on-cash?

    CoC uses leverage; cap is unlevered.

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