Calculate the capitalization rate for any commercial or residential investment property. Enter your Net Operating Income (NOI) and purchase price to get an instant cap rate, deal grade, and market context — no spreadsheets, no signup.
What Is a Cap Rate?
The capitalization rate (cap rate) is the most fundamental metric in commercial real estate underwriting. It measures the annual return a property generates relative to its purchase price, assuming an all-cash purchase with no financing. Cap rate is calculated as:
Cap Rate = Net Operating Income (NOI) ÷ Current Market Value × 100
What Is a Good Cap Rate in 2026?
A "good" cap rate depends entirely on your market and investment strategy. In high-cost coastal markets like the San Francisco Bay Area, Los Angeles, or New York, cap rates of 3.5–5% are common because investors are buying appreciation, not yield. In cash-flow markets like the Midwest or Southeast, investors typically target 7–10%+ cap rates.
- Below 4%: Compressed. Common in gateway cities. Appreciation play, not income.
- 4–6%: Market rate for most major metros in 2026.
- 6–8%: Strong yield. Typical in secondary markets.
- 8%+: High yield. Common in tertiary markets or value-add deals.
Cap Rate vs. Cash-on-Cash Return
Cap rate ignores financing — it's a property-level metric. Cash-on-cash return accounts for your actual mortgage payments and measures the yield on your invested equity. A property with a 6% cap rate might produce a 9% cash-on-cash return with leverage, or a 3% return if interest rates are high. CCIM-trained analysts always look at both.
Cap Rate and Interest Rates
Cap rates and interest rates are closely linked. When the 10-year Treasury rises, cap rates tend to expand (prices fall) to maintain spread. In 2022–2024, the Fed rate hike cycle compressed spreads significantly — many CRE assets saw cap rates below their borrowing cost, creating negative leverage. In 2026, normalization is underway but spreads remain tight in gateway markets.
How to Calculate NOI
Net Operating Income = Gross Potential Rent − Vacancy Loss − Operating Expenses. Operating expenses include property taxes, insurance, maintenance, property management fees, and utilities (if owner-paid). NOI does NOT include mortgage payments, depreciation, or income taxes.
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Cap Rate Deep Dive: Formula, Worked Example & 2026 Benchmarks
The Formula
Cap Rate = Net Operating Income ÷ Purchase Price
NOI excludes debt service — cap rate deliberately ignores financing so buyers can compare properties on the asset itself, not on how each buyer would finance it.
Worked Example
A retail strip center is listed at $2,400,000. Rent roll shows $210,000 gross income; operating expenses (taxes, insurance, CAM, management, reserves) run $66,000. NOI = $144,000.
Cap Rate = $144,000 ÷ $2,400,000 = 6.0%
Whether 6% is attractive depends entirely on the market and asset class — which is what our full market benchmarks cover in "What Is a Good Cap Rate in 2026?" on the blog.
2026 Quick Benchmarks
Coastal gateway multifamily: 3.5–5.5%. Sun Belt growth markets: 5–7%. Midwest cash-flow markets: 7–10%+. Distressed office and some retail: 8–12%+, where price has fallen to compensate for risk. In all cases, the spread between the cap rate and borrowing cost determines whether leverage helps or hurts.
The Two Ways Professionals Use Cap Rate
Forward: estimate value from income (NOI ÷ market cap rate = value — the income approach an appraiser uses). Backward: judge a listed price (NOI ÷ price = implied cap, compared against market comps). A listing whose implied cap sits far below market comps is priced on hope; far above, and something in the income or condition deserves scrutiny.
Cap Rate's Limits
Cap rate is a single-year, unleveraged snapshot. It says nothing about rent growth, capital expenditure needs, financing, or exit — which is why underwriting pairs it with DSCR, cash-on-cash, and IRR before a decision.
Data sources for market context: Federal Reserve (FRED), U.S. Census ACS, HUD Fair Market Rents.