Commercial Real Estate Cap Rate Calculator
Updated August 21, 2026
Capitalization rate, or cap rate, is a property's annual net operating income divided by its price or value. Enter NOI and price below to calculate the going-in cap rate; a $150,000 NOI on a $2,000,000 property equals a 7.5% cap rate.
Calculate capitalization rate
$150,000 NOI ÷ $2,000,000 property value
What is the cap rate formula?
Cap rate = annual NOI ÷ purchase price. Multiply the decimal result by 100 to express it as a percentage. The calculation assumes an all-cash, unlevered view of year-one operations, which makes it useful for comparing properties before buyer-specific financing.
You can also reverse the formula to estimate value: value = NOI ÷ market cap rate. A $150,000 NOI capitalized at 7.5% indicates $2,000,000; the same NOI at 6.0% indicates $2,500,000.
What is a good cap rate for commercial real estate?
There is no universal good cap rate. Required returns vary by property type, market, tenancy, lease duration, physical condition, growth expectations and risk. A lower cap rate can reflect stronger expected growth or lower perceived risk; a higher cap rate can signal more current income, more risk, or both.
Compare a subject property with relevant alternatives, then test whether its NOI is sustainable. A high cap rate based on understated expenses or temporary rent collections is not the same as durable yield.
What does cap rate leave out?
Cap rate does not include loan terms, future rent growth, future expense growth, capital expenditures, tax consequences or sale proceeds. It is a useful first screen, not a complete investment return.
Caproll's Deal Analyzer adds those missing layers with financing, debt service coverage, cash-on-cash return, capital needs and a ten-year hold projection.
Frequently asked questions
Is cap rate based on asking price or purchase price?
For screening a listing, buyers often divide NOI by asking price. For the actual investment, use the negotiated purchase price. Using both shows the yield at the ask and at your proposed basis.
Should I use current NOI or pro forma NOI?
Calculate both and label them clearly. Current NOI shows in-place operations; a pro forma depends on future leasing, rents, expenses or renovations and should be risk-adjusted.
Does cap rate include financing?
No. Cap rate is an unlevered property-level measure. Loan payments and loan terms belong in debt-service coverage and cash-on-cash calculations.
Can cap rate be negative?
Yes. A property with negative NOI has a negative cap rate, but that result is generally more useful as a warning that current operations do not support an income valuation.
