Free Calculator

Cap Rate Calculator Capitalization Rate

Check if a deal is priced right. Plug in NOI and price, compare to market.

Enter Your Numbers

$

Gross income minus operating expenses (before debt service)

$

Purchase price or current market value

Your Cap Rate

-- %

Enter your numbers to calculate

Industry Benchmarks

Multifamily 4.5% - 6.5%
Industrial 5.0% - 7.0%
Self-Storage 5.5% - 7.5%
Retail 6.0% - 8.0%
Office 6.0% - 9.0%

Rates vary by market, quality, and lease terms

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What is a Cap Rate?

Cap rate is income divided by price. Simple as that. You use it to gut-check a deal before running the full model. If the cap doesn't make sense, nothing else will.

// Cap Rate Formulas
Cap Rate = NOI ÷ Property Value
Property Value = NOI ÷ Cap Rate

Understanding Cap Rates

Lower Cap
4% - 5%

Lower risk, higher price. Class A properties in prime markets.

Mid Cap
5% - 7%

Balanced risk/return. Class B properties, secondary markets.

Higher Cap
7% - 10%+

Higher risk, better returns. Value-add, tertiary markets.

Example Calculation

A 100-unit apartment building generates $600,000 in annual NOI. It's listed for sale at $10,000,000.

Cap Rate = $600,000 ÷ $10,000,000 = 6.0%

A 6% cap rate means the property generates 6% of its value annually in net operating income. Compared to multifamily benchmarks (4.5-6.5%), this is fair market pricing.

Valuing Property from Cap Rate

If you know the NOI and market cap rate, you can estimate property value. A property with $400,000 NOI in a 5.5% cap rate market:

Value = $400,000 ÷ 0.055 = $7,272,727

What Affects Cap Rates?

  • Location: Prime urban locations command lower cap rates than tertiary markets.
  • Property quality: Class A buildings trade at lower caps than Class C.
  • Tenant quality: Credit tenants and long leases reduce risk, lowering cap rates.
  • Interest rates: Rising rates generally push cap rates higher.
  • Asset class: Multifamily and industrial typically trade at lower caps than retail or office.

Frequently Asked Questions

What is a good cap rate for commercial real estate?

Good cap rates vary by asset class and market. Multifamily typically trades at 4.5-6.5%, industrial at 5-7%, retail at 6-8%, and office at 6-9%. Lower cap rates indicate lower risk and higher prices; higher cap rates suggest higher risk but better cash-on-cash returns.

Is a higher or lower cap rate better?

It depends on your investment strategy. Lower cap rates mean lower risk but higher purchase prices. Higher cap rates offer better initial returns but may signal property or market issues. Most investors target cap rates that match their risk tolerance and return requirements.

What's the difference between cap rate and cash-on-cash return?

Cap rate measures unlevered return (NOI / Total Value) and ignores financing. Cash-on-cash return measures actual cash received relative to cash invested (Cash Flow / Equity Invested) and accounts for debt. Cap rate is used for comparing properties; cash-on-cash shows your actual return.

Why do cap rates vary so much by asset class?

Different asset classes have different risk profiles. Multifamily has stable demand (everyone needs housing), so it trades at lower cap rates. Office and retail face more uncertainty (remote work, e-commerce), so investors demand higher returns to compensate for risk.

Automate your underwriting

Primer extracts NOI, expenses, and rent data from any document format. Calculate cap rates automatically from source documents.

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