What’s a "good" cap rate?

It depends entirely on the market, property type, and risk profile — a stabilized property in a prime market might trade at a 4-5% cap rate, while a higher-risk property in a secondary market might need to offer 8-10%+ to attract buyers. Lower cap rates generally mean the market is pricing in lower risk (or more appreciation potential), not simply a "better deal."

How is the implied value at a target cap rate useful?

It’s a quick way to sanity-check an asking price: dividing NOI by your target cap rate gives the price at which the property would trade at that cap rate. If the asking price is well above that implied value, the deal is priced for a lower cap rate (and lower yield) than you’re targeting.

Business & Enterprise

Commercial Real Estate Cap Rate Calculator

Capitalization rate and net operating income from rental income, vacancy, and operating expenses.

Formula reviewed against the standard real estate cap rate formula (NOI ÷ property value) · Last checked Aug 2026 · methodology

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Formula

Cap rate from NOI

Cap Rate = Net Operating Income ÷ Purchase Price

Effective gross incomeGross rental income after subtracting expected vacancy loss

NOIEffective gross income minus operating expenses (excludes mortgage payments)

Cap rateNOI as a percentage of purchase price — the unlevered yield

Example

Worked example

A $1,200,000 property earns $150,000 gross annual rent with a 5% vacancy rate and $45,000 in annual operating expenses. Effective gross income = $150,000 × 0.95 = $142,500. NOI = $142,500 − $45,000 = $97,500. Cap rate = $97,500 ÷ $1,200,000 = 8.1%.

FAQ

Common questions

Cap rate is deliberately an unlevered measure — it evaluates the property’s own income-producing ability independent of how any particular buyer chooses to finance it. Including the mortgage would make the same property show a different cap rate for a cash buyer versus a heavily financed one, which defeats the purpose of comparing properties on equal footing.

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