Cap Rate Calculator: Capitalization Rate
Calculate capitalization rate for real estate investments. Determine property value, analyze NOI, and compare to market cap rates by property type.
Market range: 4% - 7%
7.50%
High yield - verify risk factors
NOI
$150,000
Value
$2,000,000
Low (Premium)
4%
Market Mid
5.5%
High (Value-Add)
7%
At $150,000 NOI: A 1% cap rate change = $235,294 value difference
Find Cap Rate
Cap Rate = NOI / Value
Example: $150,000 / $2,000,000 = 7.5%
Find Value
Value = NOI / Cap Rate
Example: $150,000 / 0.075 = $2,000,000
Find NOI
NOI = Value × Cap Rate
Example: $2,000,000 × 0.075 = $150,000
Capitalization rate (cap rate) is the ratio of a property's net operating income (NOI) to its purchase price or value. It's the most widely used metric in commercial real estate for comparing investment returns across properties regardless of financing.
Formula:
Cap Rate = Net Operating Income / Property Value × 100NOI is gross income minus operating expenses (excluding debt service). Higher cap rates generally indicate higher risk and return.
- 1
Enter the property's net operating income (NOI)
- 2
Input the purchase price or current value
- 3
The calculator shows the cap rate percentage
- 4
Compare to market cap rates for similar properties
- 5
Use to evaluate if a property is priced fairly
- 6
Reverse calculate to determine fair value
- Allows apples-to-apples comparison across different properties
- Indicates return on an all-cash purchase
- Helps identify overpriced or undervalued properties
- Essential metric for commercial real estate investors
- Used by appraisers to determine property values
- Evaluating commercial property investments
- Comparing properties in different markets
- Determining fair offer price
- Assessing property performance over time
- Estimating property value from NOI
- Analyzing market trends and conditions
- •Lower cap rates indicate lower risk and often better locations
- •Cap rate compression can generate significant appreciation
- •Always verify NOI figures - seller pro formas are often optimistic
- •Consider going-in cap rate vs stabilized cap rate for value-add deals
DSCR Calculator
Calculate debt coverage for financed purchases
Try Calculator →Debt Yield Calculator
Another key metric for CRE underwriting
Try Calculator →Loan Sizing Calculator
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Try Calculator →Real Estate Investment Calculator
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Frequently Asked Questions
What is a cap rate in real estate?
Capitalization rate (cap rate) is the ratio of Net Operating Income (NOI) to property value. It measures the annual return on investment assuming an all-cash purchase. Formula: Cap Rate = NOI / Property Value. A 7% cap rate means the property generates 7% annual return on its value.
What is a good cap rate for investment property?
Good cap rates vary by property type, location, and market conditions. Generally: 4-6% for prime locations and stable properties, 6-8% for average markets, 8-10%+ for value-add or higher-risk properties. Lower cap rates indicate lower risk and higher prices; higher cap rates suggest more risk or opportunity.
How does cap rate affect property value?
Cap rate and property value have an inverse relationship. Lower cap rates = higher values, higher cap rates = lower values. Example: A property with $100,000 NOI at 5% cap is worth $2M, but at 8% cap is worth only $1.25M. Cap rate compression (falling rates) increases property values.
What's the difference between cap rate and ROI?
Cap rate assumes all-cash purchase and excludes financing. ROI (or cash-on-cash return) accounts for leverage, considering only your equity investment and actual cash flow after debt service. Leveraged returns are typically higher than cap rates when financing costs are below the cap rate.
Why do different property types have different cap rates?
Cap rates reflect risk levels. Multifamily often has lower cap rates (4-6%) due to stable demand. Retail and office have higher rates (6-9%) due to longer lease-up periods and tenant risk. Industrial has compressed recently (4-7%) due to e-commerce growth. Hotels have highest rates (8-12%) due to operational complexity.