Cap Rate Calculator

What is a Cap Rate?

A capitalization rate (cap rate) is the most widely used metric in commercial real estate to evaluate the return on an investment property. It represents the ratio of a property's net operating income (NOI) to its current market value or purchase price.

Cap rates help investors quickly compare the relative value of different properties. A higher cap rate generally indicates higher potential returns but also higher risk, while a lower cap rate suggests a more stable, lower-risk investment.

Institutional investors, REITs, and lenders all rely on cap rates as a fundamental tool for pricing and evaluating commercial real estate transactions.

How to Calculate Cap Rate

The cap rate formula is straightforward:

Example: A property generates $150,000 in annual NOI and is valued at $2,000,000. The cap rate is ($150,000 / $2,000,000) x 100 = 7.5%.

You can also rearrange the formula to solve for property value (Value = NOI / Cap Rate) or NOI (NOI = Value x Cap Rate), which is why this calculator offers all three modes.

What is a Good Cap Rate?

Cap rates vary significantly by property type, location, and market conditions. Here are typical ranges:

A "good" cap rate depends on your investment strategy, risk tolerance, and market. Gateway cities like New York and San Francisco typically have lower cap rates than secondary and tertiary markets.

Cap Rate vs IRR

While cap rate provides a snapshot of current yield, the Internal Rate of Return (IRR) measures the total return over the entire holding period, including appreciation, rent growth, and sale proceeds.

Cap rate is best for quick comparisons and initial screening. IRR is better for detailed investment analysis when you need to account for leverage, capital expenditures, and exit assumptions. For a complete analysis, most institutional investors use both metrics together.