Capitalization Rate (Cap Rate

Commercial Real Estate: What is Cap Rate and Why Does it Exclude Debt Service?

The Capitalization Rate (Cap Rate) is the purest metric for comparing real estate profitability across different properties independently of financing:

• Why Mortgage Debt is Excluded: An investor paying 100% all-cash and an investor using an 80% LTV mortgage purchase the exact same property. The physical asset's earning power (NOI) does not change based on the buyer's personal loan terms.

• Cap Rate vs. Risk: Lower cap rates (3%–5%) reflect safer, highly liquid Tier-1 markets (New York, San Francisco), while higher cap rates reflect higher risk in emerging or rural markets.

How to Use This Calculator

Enter your Property Purchase Price / Market Value () (e.g. 650000), Gross Annual Scheduled Rental Income ( / year) (e.g. 72000 (6,000/month)), Vacancy & Credit Loss Rate (%) (e.g. 5.0), Annual Operating Expenses ( / year -- Taxes, Ins, Mgt, Repairs) (e.g. 24500 (Excludes mortgage debt service)), and Market Target / Benchmark Cap Rate (%) [for Valuation] (e.g. 6.5). Results update instantly as you type — adjust any value to compare scenarios.

The Formula

Commercial real estate Cap Rate & Net Operating Income (NOI) equations: Gross Income (EGI) = Gross Scheduled Rent × (1 - Vacancy \& Credit Loss Rate (\%)) Operating Income (NOI) = Effective Gross Income (EGI) - Operating Expenses (Excluding Mortgage Debt) Rate (Cap Rate \%) = ((Net Operating Income (NOI)) / (Property Purchase Price)) × 100\% Fair Market Valuation = (Net Operating Income (NOI)) / (Market Benchmark Cap Rate (Fraction)) Rental Yield (\%) = ((Gross Annual Scheduled Rent) / (Property Purchase Price)) × 100\%

Worked Example

For example, evaluating a 650,000 apartment building with 72,000 gross annual rent, 5.0% vacancy, and 24,500 in annual operating expenses (property taxes, insurance, management, maintenance): . The Cap Rate is \. At a 6.50% market benchmark cap rate, the building's fair market valuation is \ (representing a 25,384 value upside).

Understanding Your Result

Cap rate = Net Operating Income ÷ Property Value. Market benchmarks vary by property type and location: multifamily urban core 3.5–5.5%, suburban multifamily 5–7%, retail strip center 6–8%, industrial 4–6%, office 5–7.5%. A lower cap rate reflects higher property values relative to income (core markets, trophy assets). Investors typically require a spread of 150–250 basis points above the 10-year Treasury yield. Rising interest rates compress cap rate spreads and can pressure values even when NOI is stable.