Commercial Cap Rate Calculator
A capitalization (cap) rate is a commercial property's net operating income divided by its price or value, expressed as a percentage — the quickest way to compare the going-in yield of two deals.
Cap Rate
- NOI
- $150,000
- Price / value
- $2,500,000
- Cap rate
- 6.00%
What Is a Cap Rate?
A capitalization rate — cap rate for short — is a commercial property's net operating income (NOI) divided by its purchase price or current market value, expressed as a percentage. It's the single most-used shorthand in commercial real estate for describing how a deal is priced relative to the income it produces.
Cap rate is an unlevered yield — it ignores how the deal is financed and measures return as if the property were bought entirely with cash. Another way to read it: cap rate is the price of a dollar of NOI. A lower cap rate means investors are paying more for each dollar of income (a premium, priced for safety or growth); a higher cap rate means they're paying less for each dollar of income (priced for more risk).
Because it strips out financing, cap rate lets investors compare deals of very different sizes and asset types on a common, apples-to-apples basis before layering in a specific loan, exit strategy, or hold period.
The Formula, Step by Step
Cap Rate (%) = (Net Operating Income ÷ Purchase Price) × 100
Worked example: solving for cap rate
Say a property is listed at a purchase price of $2,000,000, and its annual net operating income — gross income minus operating expenses, before debt service — is $130,000. (Hypothetical numbers, for illustration only.)
NOI ÷ Price = $130,000 ÷ $2,000,000 = 0.065
0.065 × 100 = 6.5% cap rate
Inverted example: solving for price from a target cap rate
The same formula runs in reverse to answer a different question: "What's the most I can pay to hit a target yield?" If a property's NOI is $150,000 and an investor requires a 6% cap rate to buy it, rearranging the formula gives the maximum purchase price:
Price = NOI ÷ Cap Rate
Price = $150,000 ÷ 0.06 = $2,500,000
Ontario CRE Benchmarks by Asset Type — Median Price, Volume, and Cap Rate Where Disclosed
| Asset type | Median sale price | Cap rate range | Sales |
|---|---|---|---|
| Other | $1,900,000 | n/a | 7724 |
| Land | $2,425,000 | n/a | 5870 |
| Multifamily | $2,200,000 | n/a | 5383 |
| Industrial | $2,850,000 | n/a | 4641 |
| Retail | $1,850,000 | n/a | 3985 |
| Office | $2,200,000 | n/a | 2078 |
Source: EVALUAITE Market Intelligence — Ontario CRE transactions · Ontario, 2021–2025 (last 5 years of recorded sales).
What the Calculator Doesn't Tell You
In-place vs. stabilized NOI. A cap rate is only as good as the NOI behind it. Run this calculator on today's trailing income and you get an in-place cap rate — but appraisers and lenders typically underwrite off stabilized NOI, the income once the property is leased up and operating normally. On an under-leased building those two numbers can diverge sharply, and the gap between them — driven by vacancy and lease-up timing — is exactly what a single cap rate hides. Our article on why cap rates alone can mislead — the critical role of vacancy and absorption in underwriting goes deeper on this.
Expense treatment under NNN leases. Whether property tax, insurance, and common-area maintenance are recoverable from tenants changes what actually lands in NOI. Two buildings at the identical headline cap rate can carry very different owner-borne expense loads depending on lease structure — a detail the calculator has no way to see from a single NOI figure.
Same cap rate, different risk. Cap rate says nothing about tenant credit quality, lease rollover risk, submarket trajectory, or physical condition. A stabilized, multi-tenant industrial property and a single-tenant retail box with a lease expiring next year can trade at the same 6% cap rate for completely different reasons — one priced for continuity, the other for uncertainty.
Closing that gap is exactly what a full proforma is for — modeling in-place vs. stabilized income, lease-specific expense recoveries, and multi-year projections together instead of collapsing them into one number. See how to build a real estate proforma for the full walkthrough, or our guide to AI commercial real estate software for how modern platforms build that model directly from your deal documents.
Benchmarks are calculated from real closed transactions in EVALUAITE's Ontario transaction dataset (last 5 years). Cap-rate ranges use only sales with a disclosed cap rate — sparse for some asset types, shown as "n/a" rather than estimated.
By the EVALUAITE Team · Powered by the EVALUAITE proforma engine.
Frequently Asked Questions
How do you calculate cap rate?
Cap rate = net operating income (NOI) ÷ purchase price or current value, expressed as a percentage. A property with $150,000 NOI on a $2,500,000 price has a 6% cap rate.
What is a good cap rate for commercial real estate?
There's no single 'good' number — it depends on asset type, market, tenant risk, and the interest-rate environment. Investors accept a lower cap rate (a higher price per dollar of income) for stabilized, low-risk assets in strong markets, and demand a higher cap rate to compensate for weaker locations, shorter lease terms, or capital-intensive buildings. See the live Ontario benchmarks above for how this plays out by asset type in real closed transactions — but treat any single cap rate as one input, not a verdict.
Does a higher cap rate mean a better investment?
Not necessarily. A higher cap rate usually reflects higher perceived risk (weaker location, tenant credit, or building condition), while a lower cap rate reflects a premium, lower-risk asset. Cap rate alone doesn't capture financing, growth, or exit assumptions.
What's the difference between cap rate and cash-on-cash return?
Cap rate is unlevered — it ignores financing and answers 'what does this property yield if bought with cash?' Cash-on-cash return divides annual pre-tax cash flow by actual cash invested, so it reflects your specific financing and is typically higher when a property is well-levered.
Does cap rate include my mortgage or financing costs?
No. Cap rate is calculated before debt service — it's an unlevered, all-cash measure of yield. Two buyers financing the same property completely differently (all-cash vs. highly leveraged) still calculate the same going-in cap rate; what differs is their cash-on-cash return and DSCR. Use the DSCR calculator to see how financing affects coverage on top of the cap rate.
How is NOI calculated, and does it use in-place or stabilized income?
NOI = gross income (rent plus other income) minus operating expenses (property tax, insurance, utilities, repairs, management), before debt service and capital expenditures. Watch which income basis it's built on: 'in-place' NOI reflects current leases and current occupancy today, while 'stabilized' NOI reflects income once the property is leased up and operating normally. A cap rate quoted on in-place income can look very different from one quoted on stabilized income for the same building.
Why do cap rates differ by property type?
Investors price risk and growth expectations differently across asset types — lease structures (NNN vs. gross), tenant credit quality, vacancy volatility, and capital-intensity all vary by sector, which shows up as different going-in cap rates.
This calculator gets you the number. EVALUAITE builds the underwrite.
EVALUAITE builds the full proforma — NOI, cap rates, DSCR, and multi-year projections — from your own deal documents, so you're working from stabilized numbers and real lease terms instead of a single ratio.
Start Free Trial