What a cap rate is
The capitalization rate is a property's net operating income divided by its value or price. It is the unlevered annual return on the purchase, before financing, and it is the most common shorthand for how a market prices income.
Cap rate = net operating income / value. Value = net operating income / cap rate. With any 2 of the 3, the calculator solves the third.
Worked example
A property with $650,000 of net operating income priced at $10,000,000 trades at a 6.50% cap rate. Valued at a 7.00% cap rate, the same income is worth $9,285,714.
Why cap rates matter for financing
Loan proceeds follow value. When cap rates rise, the same income supports a lower value, and a loan sized to loan-to-value shrinks with it. That is why a refinance can produce less cash than expected even when income has grown. The loan sizing calculator shows how value, coverage, and debt yield combine to set proceeds.
Positive leverage exists when the cap rate is higher than the loan's constant, the annual debt service as a percentage of the loan. When the loan costs more than the property yields, adding debt lowers the equity return.
Common questions
What is a good cap rate for commercial real estate?
There is no single good cap rate. Cap rates vary by property type, market, tenant quality, lease term, condition, and the interest rate environment. Lower cap rates reflect lower perceived risk and higher prices.
How do you calculate the value of a commercial property from NOI?
Divide net operating income by the cap rate. A property with $650,000 of net operating income valued at a 6.50% cap rate is worth $10,000,000.
Is the cap rate the same as the interest rate?
No. The cap rate is the property's unlevered yield. The interest rate is the cost of the loan. Comparing the two, along with amortization, shows whether debt raises or lowers the return on equity.
Do lenders use the cap rate in the appraisal?
The income approach in a commercial appraisal usually capitalizes net operating income at a market cap rate. The resulting value drives loan-to-value sizing.