🏬 Commercial Real Estate Cap Rate Calculator
Calculate commercial real estate Capitalization Rate (Cap Rate), Net Operating Income (NOI), and Gross Rent Multiplier (GRM) for investment properties.
Income and expenses (annual)
Rent at 100% occupancy.
Parking, laundry, storage, pet rent, utility reimbursements.
Taxes, insurance, management, repairs, utilities. NOT the mortgage, capex, depreciation or income tax.
Financing (optional)
With 70% leverage
What a cap-rate shift does to the value, at this NOI
This is the risk hiding inside a cap rate. Because value is NOI divided by the rate, the lower the cap rate the more violently value moves — and cap rates move with interest rates, not with your building.
NOI excludes mortgage payments, capital expenditures, depreciation and income taxes. That is what makes cap rate comparable between a building bought with cash and one carrying debt — and it is why cap rate alone cannot tell a leveraged buyer whether a deal works. There is also no single NOI: a broker’s marketing figure, an appraiser’s stabilized figure and a lender’s underwritten figure routinely differ on management fees, replacement reserves and the vacancy assumption. Ask which one you are looking at.
What Commercial Real Estate Cap Rate Calculator Does
A capitalization rate is net operating income divided by price. It is the yield a property would produce if you bought it outright, and its whole purpose is to be comparable — because it ignores your financing, it lets you line up a building someone bought with cash against one carrying a mortgage.
That is also its limitation. Cap rate deliberately excludes debt service, so on its own it cannot tell a leveraged buyer whether a deal works. For that you need cash-on-cash return, which measures your actual cash against your actual equity, and DSCR, which is what the lender will test before deciding how much to lend.
The single most common error is putting the mortgage into operating expenses. NOI excludes four things: debt service, capital expenditures, depreciation and income taxes. A roof replacement is not an operating expense however painful the invoice, and the mortgage belongs to you rather than to the building.
The thing worth understanding before you buy anything is the sensitivity. Value is NOI divided by the cap rate, so value moves inversely and non-linearly with a number set by the market rather than by your building. At a 7.58% cap, a one-point rise takes 11.7% off the value; a one-point fall adds 15.2%. Cap rates move with interest rates, which is how a well-run building loses a fifth of its value in a year without a single tenant leaving.
How to Use Commercial Real Estate Cap Rate Calculator
- Enter property purchase price and annual gross rental revenue
- Input operating expenses and vacancy rate percentage
- Review computed Cap Rate, annual Net Operating Income (NOI), and Gross Rent Multiplier (GRM)
Formula Used by Commercial Real Estate Cap Rate Calculator
One equation, three ways round — plus the leverage tests
cap rate = NOI ÷ value · value = NOI ÷ cap rate · NOI = value × cap rate · DSCR = NOI ÷ annual debt service · cash-on-cash = (NOI − debt service) ÷ equity
- EGI
- effective gross income — scheduled rent less vacancy and credit loss, plus parking, laundry, storage and reimbursements
- NOI
- EGI minus operating expenses. Excludes mortgage, capex, depreciation and income tax
- debt yield
- NOI ÷ loan amount — the lender's own test, independent of rate and term
Worked example
$1,200,000 property, $140,000 scheduled rent, 5% vacancy, $42,000 operating expenses, 70% loan at 6.5% over 25 years.
- EGI = 140,000 × 0.95 = $133,000
- NOI = 133,000 − 42,000 = $91,000
- Cap rate = 91,000 ÷ 1,200,000 = 7.58%
- Loan $840,000, annual debt service $68,061
- DSCR = 91,000 ÷ 68,061 = 1.34; cash flow = $22,939 on $360,000 equity
Result: 7.58% cap, 6.37% cash-on-cash, DSCR 1.34 and a 10.8% debt yield — a deal most lenders would size comfortably.
What a one-point cap rate move does to value
At $91,000 NOI. Because value is NOI divided by the rate, the effect is asymmetric — falls help more than rises hurt, in percentage terms.
| Cap rate | Value | Change |
|---|---|---|
| 6.58% | $1,382,278 | +15.2% |
| 7.08% | $1,284,706 | +7.1% |
| 7.58% | $1,200,000 | today |
| 8.08% | $1,125,773 | −6.2% |
| 8.58% | $1,060,194 | −11.7% |
What never belongs in NOI
Excluding these is what makes cap rates comparable across buyers.
| Excluded | Why |
|---|---|
| Mortgage payments | NOI is measured before financing, so a lender can compare your building against an unmortgaged one |
| Capital expenditures | A new roof is an investment in the asset, not a cost of operating it |
| Depreciation and amortization | Non-cash, and a tax concept rather than an operating one |
| Income tax and owner draws | These belong to the owner, not to the property |
The lender's tests
| Metric | Typical minimum | What it protects against |
|---|---|---|
| DSCR | 1.20–1.25 | Income falling short of the payment |
| Debt yield | 9–10% | Cap-rate compression having inflated the valuation |
| Loan to value | 65–75% | A fall in value wiping out the lender's cushion |
How to Read Your Result
A high cap rate is compensation for risk
A 9% cap in a weak submarket and a 4.5% cap on a prime asset are both rational prices. The higher rate is paying you for vacancy risk, tenant quality, deferred maintenance or a location the market expects to weaken. Sorting deals by cap rate alone is sorting them by risk.
Ask whose NOI you are looking at
A broker's marketing NOI, an appraiser's stabilized NOI and a lender's underwritten NOI can describe the same building and differ by six figures. The disagreements are predictable: whether a management fee is included when the owner self-manages, whether replacement reserves sit above or below the line, and whether vacancy reflects the submarket or last month's rent roll.
Cash-on-cash is where leverage shows up
When the cap rate is above the loan constant, borrowing raises your return on equity; when it is below, leverage works against you. That crossover is why the same building is a good buy at one interest rate and a bad one at another, with nothing about the property having changed.
Watch the expense ratio, not just the total
Operating expenses running under about 30% of effective gross income on an older building usually means something has been left out — most often management, reserves or a realistic repair budget. An unusually good cap rate is often just an unusually optimistic expense line.
Limitations & Accuracy Notes
- A snapshot at one moment. It says nothing about rent growth, lease rollover, or capital expenditure coming due.
- Cap rate ignores financing entirely — that is the point of it, and the reason it cannot answer a leveraged buyer's question on its own.
- No allowance for capital expenditure or replacement reserves, which many buyers deduct before calling a figure NOI.
- Closing costs, transfer taxes and acquisition fees are not included in the price.
- Tax treatment, depreciation benefits and 1031 exchanges are outside the calculation and can change the outcome materially.
- Nothing here is investment advice.
Frequently Asked Questions
What is a Cap Rate in commercial real estate?
What is Net Operating Income (NOI)?
How is a cap rate calculated?
What counts in net operating income?
Does a higher cap rate mean a better investment?
Why do cap rates vary by market and asset type?
Is this investment advice?
References & Further Reading
- Janover / Multifamily.loans — NOI, cap rate and debt yield — The four exclusions from NOI and the lender tests described above