Cap Rate Calculator

The capitalization rate measures the relationship between a property's net operating income and its purchase price. Divide the annual NOI by the price, and you get a percentage that tells you what yield the property generates at the current income level. It is the most common metric in commercial real estate for comparing investment opportunities across asset classes, markets, and deal sizes.

Cap rates vary significantly by property type, location, and market conditions. A Class A multifamily property in a primary market might trade at a 4.5% cap rate, while a single-tenant retail property in a secondary market might trade at a 7.5%. Neither number is inherently good or bad. What matters is how the cap rate compares to your cost of capital, your return requirements, and comparable transactions in the market.

The cap rate formula is straightforward: divide a property's annual net operating income by its purchase price (or current market value), then multiply by 100 to express as a percentage.

Worked example: A 120-unit multifamily property generates $850,000 in annual NOI. The asking price is $12,500,000. The cap rate is $850,000 / $12,500,000 = 6.8%.

You can also reverse the formula. If you know the NOI and a target cap rate, you can calculate the implied property value: $850,000 NOI / 6.8% cap rate = $12,500,000. This is how buyers determine what they should pay, and how brokers price listings.

There is no single "good" cap rate. The right cap rate depends on the asset class, market, property condition, tenant quality, and your return requirements. Here are typical ranges by property type:

These ranges shift with market cycles. When interest rates are low and capital is abundant, cap rates compress across all asset classes. When rates rise and debt becomes more expensive, cap rates expand. The spread between the cap rate and the cost of debt is what determines leveraged returns.

Investment teams use cap rates at every stage of a deal. During sourcing, cap rates filter which opportunities are worth pursuing. During underwriting, they frame the entry basis and inform exit assumptions. During IC presentations, they anchor the discussion around value relative to the market.

The cap rate also drives exit valuation. If you buy a property at a 6.5% going-in cap rate, grow NOI by 15% over a 5-year hold, and sell at a 6.75% exit cap rate, your exit value is determined by that exit cap rate applied to the higher NOI. A 25 basis-point difference in exit cap rate assumptions can change the total return on a deal by millions of dollars.

MotionCRE tracks cap rates automatically across your deal pipeline, so every deal's cap rate is visible alongside its stage, pricing, and key metrics in one view.

Cap rate is a useful starting point, but it does not tell the full investment story. Here is how it compares to other common metrics:

• Cap rate vs. cash-on-cash return: Cap rate ignores leverage entirely. Cash-on-cash return measures the annual yield on the equity you actually invested, accounting for debt service. A property with a 6% cap rate could produce an 8% or 12% cash-on-cash return depending on how it is financed. Calculate your cash-on-cash return.
• Cap rate vs. IRR: Cap rate is a snapshot at a single point in time. IRR accounts for the time value of money across the entire hold period, including income growth, capital expenditures, and exit proceeds. Model full deal returns with IRR.
• Cap rate vs. GRM: Gross Rent Multiplier uses gross income (before expenses), while cap rate uses net operating income. GRM is simpler but less precise because it ignores operating cost differences between properties.
• Cap rate vs. DSCR: DSCR measures whether the property income covers debt payments. Cap rate measures unlevered yield. A property can have a strong cap rate but a weak DSCR if the loan is sized aggressively. Check your deal's DSCR.

• Using gross income instead of NOI. Cap rates are calculated from net operating income, not gross rental income. Forgetting to deduct vacancy, property taxes, insurance, and management fees will produce an artificially low cap rate.
• Ignoring vacancy and credit loss. Even stabilized properties carry some vacancy. Using 100% occupancy in your NOI calculation inflates the cap rate and misrepresents the investment.
• Comparing cap rates across different markets. A 6% cap rate in Dallas means something different than a 6% cap rate in San Francisco. The risk profile, growth expectations, and liquidity of each market are different.
• Confusing going-in and exit cap rates. The going-in cap rate is what you pay. The exit cap rate is what you assume the next buyer will pay. Using one where you need the other will misstate your return projections.
• Relying on cap rate alone. Cap rate does not account for leverage, capital expenditure needs, lease rollover risk, or income growth. Always evaluate it alongside DSCR, cash-on-cash return, and IRR for a complete picture.