Cap Rate Calculator

The capitalization rate (cap rate) is essential for commercial real estate analysis. It represents expected return based on property income, independent of financing decisions.

Cap rate equals Net Operating Income divided by property value. Higher cap rates indicate higher potential returns but often higher risk. Lower caps typically mean more stable, established markets.

Typical cap rates: Class A apartments in major metros trade at 4-5%; value-add properties in secondary markets might offer 7-10%. Use cap rate to compare similar properties and assess relative value.

Calculate Now

How to Use This Calculator

1 Calculate or enter the property's Net Operating Income (NOI)
2 Enter the property's current market value or asking price
3 Click Calculate to see the capitalization rate
4 Compare to similar properties and market benchmarks
5 Use cap rate to evaluate relative value

Formula

Cap Rate = (NOI ÷ Property Value) × 100

Example Calculation

Evaluating a multifamily property listed at $1,200,000

Inputs:

NOI: $72,000/year
Property Value: $1,200,000

Result:

Cap Rate = $72,000 ÷ $1,200,000 = 6.0%

Pro Tips

Compare similar property types only
Lower cap = lower risk, higher price
Cap rates vary significantly by market

Important Considerations

• Single-family homes often don't use cap rates—use cash-on-cash instead
• Stabilized NOI vs. current NOI can show different cap rates for value-add deals
• Compare only similar property types—don't compare retail cap to residential

Frequently Asked Questions

Cap rates vary by property type and market. Class A apartments in major metros: 4-5%. Value-add properties: 6-8%. Secondary markets: 7-10%. Higher cap = higher potential return but often higher risk or less desirable location.

Cap rate provides a standardized way to compare properties regardless of financing. It estimates expected return and helps determine fair market value. Property Value = NOI ÷ Cap Rate, making it essential for valuation.

No. Cap rate uses NOI, which excludes debt service. This makes it financing-neutral, allowing comparison of properties regardless of how they're financed. For leveraged returns, use Cash-on-Cash calculation instead.

Cap rates compress (decrease) when: interest rates fall, investor demand increases, or markets appreciate. They expand (increase) when: rates rise, markets soften, or risk perception increases. Track trends in your target markets.