Cap rate (capitalization rate) measures the rate of return on a real estate investment based on the income it generates. It's calculated by dividing Net Operating Income (NOI) by property value. A 6% cap rate means the property generates 6% of its value annually in net income.

How do you calculate cap rate?

Cap Rate = Net Operating Income (NOI) / Property Value. For example, a property with $500,000 NOI selling for $8,000,000 has a cap rate of 6.25% ($500,000 / $8,000,000 = 0.0625 or 6.25%).

How do you calculate property value from cap rate?

Property Value = NOI / Cap Rate. If a property generates $400,000 NOI and similar properties trade at a 5.5% cap rate, the implied value is $7,272,727 ($400,000 / 0.055 = $7,272,727).

Cap Rate Calculator | Free Capitalization Rate Tool

Cap Rate Calculator Capitalization Rate

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A cap rate (capitalization rate) is a real estate metric that measures an investment property's rate of return. It is calculated by dividing the property's Net Operating Income (NOI) by its current market value or purchase price. A property with $500,000 NOI and a $10,000,000 value has a 5.0% cap rate. Investors use cap rates to quickly compare properties, assess risk, and determine fair pricing across asset classes and markets.

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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.

Sources: CBRE U.S. Cap Rate Survey, NCREIF Property Index

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.

What is the difference between cap rate and yield?

Cap rate is calculated on the purchase price (NOI / Purchase Price) and remains static. Yield (or return on cost) can factor in total investment including renovations and capital expenditures. For value-add deals, yield on cost is often higher than the going-in cap rate because you're improving NOI relative to total spend.

How do interest rates affect cap rates?

Interest rates and cap rates generally move in the same direction. When interest rates rise, the cost of debt increases, which puts upward pressure on cap rates as buyers require higher returns. The spread between cap rates and the 10-year Treasury yield is a key metric investors watch — historically this spread ranges from 150 to 300 basis points.

What is cap rate compression?

Cap rate compression occurs when cap rates decrease over time, causing property values to rise for the same NOI. For example, if market cap rates compress from 6% to 5%, a property generating $500,000 NOI increases in value from $8.3M to $10M without any change in income. Compression typically happens when capital floods into a market or interest rates fall.

What are typical cap rates by asset class in 2026?

As of early 2026, typical cap rate ranges are: Multifamily 4.5-6.5%, Industrial 5.0-7.0%, Self-Storage 5.5-7.5%, Retail 6.0-8.0%, and Office 6.0-9.0%. These vary significantly by market tier, property class, and lease structure. Cap rates have stabilized after rising in 2023-2024 due to interest rate increases.