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Commercial Real Estate Cap Rate Calculator

Include taxes, insurance, maintenance, and management fees.

Investment Summary

Net Operating Income (NOI)

Capitalization Rate

function calculateCapRate() { var val = parseFloat(document.getElementById("propertyValue").value); var gross = parseFloat(document.getElementById("grossIncome").value); var exp = parseFloat(document.getElementById("operatingExpenses").value); var resArea = document.getElementById("resultArea"); var noiRes = document.getElementById("noiResult"); var capRes = document.getElementById("capRateResult"); if (isNaN(val) || isNaN(gross) || isNaN(exp) || val <= 0) { alert("Please enter valid positive numbers for all fields."); return; } var noi = gross – exp; var capRate = (noi / val) * 100; noiRes.innerHTML = "$" + noi.toLocaleString(undefined, {minimumFractionDigits: 2, maximumFractionDigits: 2}); capRes.innerHTML = capRate.toFixed(2) + "%"; resArea.style.display = "block"; }

Understanding Cap Rate in Commercial Real Estate

The Capitalization Rate, or "Cap Rate," is the most fundamental metric used in commercial real estate to evaluate the profitability and return potential of an investment property. It represents the yield of a property over a one-year time horizon assuming the asset was purchased with cash.

The Cap Rate Formula

To calculate the cap rate manually, you use the following formula:

Cap Rate = (Net Operating Income / Current Market Value) × 100

What Components Drive the Calculation?

• Net Operating Income (NOI): This is your gross rental income minus all necessary operating expenses (property taxes, insurance, repairs, property management). Note that NOI does not include mortgage interest or principal payments.
• Property Value: For a new acquisition, this is the purchase price. For an existing asset, this is the current appraised market value.

Real-World Example

Imagine you are looking at a retail strip mall listed for $2,500,000. The building generates $250,000 in annual rent. After paying for property taxes, landscaping, and insurance, your total expenses are $75,000.

1. Calculate NOI: $250,000 – $75,000 = $175,000.
2. Calculate Cap Rate: ($175,000 / $2,500,000) = 0.07.
3. The Cap Rate is 7.0%.

Why Cap Rates Matter

Cap rates are essential for comparing two similar properties in the same market. A higher cap rate typically implies higher risk but also higher potential return. Conversely, a lower cap rate (often seen in "Class A" properties in major cities like NYC or San Francisco) indicates lower risk and higher stability.

Investors use this calculator to quickly filter deals. If the prevailing market cap rate for industrial warehouses in your area is 5%, and you find a listing at an 8% cap rate, it may be a "value-add" opportunity or it may signal underlying issues with the tenant or structure.

Limitations to Consider

While useful, the cap rate shouldn't be your only metric. It doesn't account for leverage (mortgage debt), future rent increases, capital expenditures (like a new roof), or tax implications. For a deeper analysis, investors should also calculate the Cash-on-Cash Return and the Internal Rate of Return (IRR).