Cap Rate Calculator — Instant
7.50%
Formula: NOI / Price
Formula: Cap Rate = (Net Operating Income ÷ Purchase Price) × 100
- Base Cap Rate: 7.50%
- If NOI changes: -10% → 6.75% | +10% → 8.25%
- If Price changes: -10% → 8.33% | +10% → 6.82%
📊 What does this mean?
Your 7.50% cap rate suggests a moderate-risk profile, typical for Class B properties with solid fundamentals.
- 4-6%: Lower risk, Class A properties in stable markets.
- 6-8%: Moderate risk, Class B properties with solid fundamentals.
- 8-10%: Higher risk, Class C properties or value-add opportunities.
- 10%+: High risk, distressed assets or emerging markets.
💡 Pro Tip: Compare your cap rate to the 10-year treasury rate. A healthy commercial property should offer at least 2-3% above treasury rates to justify the risk premium.
Understanding Cap Rate
Want a deeper dive? Read our Complete 2025 Guide to Understanding Cap Rate.
The Capitalization Rate, or "Cap Rate," is one of the most fundamental metrics in commercial real estate analysis. It represents the unlevered annual rate of return an investor can expect to generate from an income-producing property. In simple terms, it measures a property's profitability relative to its purchase price.
Typical Cap Rates by Market & Property Type
| Property Type | Gateway City (Class A) | Secondary Market | Tertiary Market |
|---|---|---|---|
| Multifamily | 4.0-5.5% | 5.5-6.5% | 6.5-8.0% |
| Office | 5.0-6.5% | 6.5-7.5% | 7.5-9.0% |
| Retail | 5.5-7.0% | 7.0-8.0% | 8.0-10.0% |
| Industrial | 5.0-6.5% | 6.5-7.5% | 7.5-9.0% |
Investors use cap rates to quickly compare the performance of different properties or markets. A higher cap rate generally indicates a higher potential return but often comes with higher risk. Conversely, a lower cap rate implies lower risk and a more stable, predictable income stream, but with a lower return. The metric is crucial because it allows for an apples-to-apples comparison of properties, irrespective of how they are financed.
Frequently Asked Questions
It depends on property type, location, and risk tolerance. Generally, 5–10% is a common range for stable commercial properties in urban areas. Lower cap rates (4-6%) imply lower risk and higher value, while higher rates (8%+) suggest higher risk or a value-add opportunity.
No, a cap rate is a snapshot of a property's performance based on its current net operating income. It does not account for future appreciation, changes in market rents, or unexpected expenses. It's a measure of current yield, not a projection of total return.
Rising interest rates typically increase cap rates (which lowers property values). This happens because as borrowing becomes more expensive, investors demand higher returns (a higher cap rate) to compensate for the increased cost of financing and to match yields available from lower-risk investments like bonds.