Cap rate calculator

How it works

Value = annual NOI ÷ cap rate  ·  Cap rate = annual NOI ÷ value

Net operating income is what a building collects in rent, minus what it costs to run: taxes, insurance, repairs, management and the utilities the owner pays. Loan payments are left out. The cap rate is the yield a buyer accepts on that income, so dividing one by the other gives the price. There's a full explanation of cap rates and another of NOI if you want the background.

Why half a point matters

The line under the result shows the same income at half a point lower and higher. On a building worth a million dollars, that's roughly a hundred thousand either way, with no change in the rent. This is why investors watch interest rates: when borrowing gets dearer, buyers want higher cap rates, and prices fall even though the buildings earn the same.

The presets come from a game

The buildings in the list are from CRE Tycoon, a free commercial real estate game. Its 275 buildings list at cap rates from 5.5% to 9.3%, and their values follow this same formula. The presets are leased-up buildings, so the value matches the asking price. Part-empty buildings ask more than today's income supports, because the seller is charging for the lease-up.

In the game, the cap rate also moves with the market cycle, so the same income is worth more in a boom than in a downturn. Leasing a building up raises its NOI and its value, and that gap is what a refinance or a sale turns into cash. See how the simulation works, or try it on a real career.

Next: can the building carry a loan?

Value is half the story. The DSCR calculator checks whether the income covers the loan payment, the test every bank runs.

Questions

How do you calculate a cap rate?

Divide a year of net operating income by the price or value. A building earning $60,000 a year of NOI and priced at $1,000,000 trades at a 6% cap rate.

How do you value a building from its cap rate?

Divide a year of NOI by the cap rate. $60,000 of NOI at a 6% cap rate is worth $1,000,000; at 5% it is worth $1,200,000.

What is a good cap rate?

There is no single good number. Lower cap rates mean buyers pay more for each dollar of income, usually for safer, newer or better-located buildings. Compare only similar buildings in the same market at the same time.