Cap Rate Calculator
Solve for cap rate, property value, or required NOI. Tap a property type below to load typical 2026 cap rate ranges by asset class.
Cap rate = NOI / Property Value. Higher cap rate means higher yield but typically more risk (older buildings, secondary markets, value-add).
Need to underwrite the full deal? We've got more free calculators (cash-on-cash, debt service coverage, IRR) in the commercial calculators hub.
A cap rate (capitalization rate) is the unleveraged annual return a commercial property produces, expressed as Net Operating Income ÷ Property Value. A $1,000,000 building generating $80,000 in NOI is an 8% cap rate. It's the most-quoted, most-misunderstood number in commercial real estate.
In 2026, cap rates vary widely by asset class: trophy multifamily and net lease compress to 4.5-6.0%, industrial big-box runs 5.5-7.0%, Class A office sits at 6.0-8.0%, Class B office has repriced to 8.5-11%, and retail anchor centers trade at 6.5-8.0%.
But here's what cap rates DON'T tell you: they ignore financing. Once you add a mortgage, your actual cash-on-cash return can be much higher or much lower than the cap rate. Cap rate is a starting point for analysis, not the final answer. Read on for the full asset-class breakdown, the worked math, and the four biggest mistakes I see new investors make when comparing cap rates.
Cap rate is the single most-quoted, most-misunderstood number in commercial real estate. Brokers throw it around like everyone knows what it means. Sellers chase it down. Investors get fixated on hitting a specific cap. And most of the time, the people using the word are using it loosely. Here's the truth: cap rate is a simple formula, but what counts as a "good" cap rate depends entirely on the asset class, the market, and what you're trying to do with the deal.
In this article, I'm going to walk you through exactly what a cap rate is, how to calculate it, what's considered a good cap rate in 2026 across every major asset class, and how to use it without falling into the traps I see new commercial real estate investors walk into all the time. The interactive calculator above is yours to use on any deal you're underwriting.
In This Article
What Is a Cap Rate? (The Basic Formula)
What Is a Good Cap Rate in 2026?
Is a 5%, 6%, 7%, or 8% Cap Rate Good?
What Is a Cap Rate? (The Basic Formula)
A capitalization rate (cap rate) is the unleveraged annual return a commercial property produces, expressed as a percentage of its price. Think of it as the property's yield if you paid all cash. The formula is dead simple:
Cap Rate = Net Operating Income (NOI) ÷ Property Value
NOI is the income the property generates after operating expenses but before debt service. So if a building generates $100,000 in NOI and you buy it for $1,250,000, the cap rate is 8%. Same building bought for $1,667,000 is a 6 cap. The math doesn't change. What changes is how much you paid for the same income stream.
Here's the part most people miss: cap rate is a snapshot, not a return on investment. It tells you what the property yields at a moment in time, with no financing involved. Once you add a mortgage to the picture, your actual cash-on-cash return can be much higher or much lower than the cap rate, depending on your terms.
How to Calculate a Cap Rate
Let's run a real one. Say a 20,000 SF industrial flex building is on the market for $2,000,000. It generates $200,000 in gross rent annually. Operating expenses (taxes, insurance, management, maintenance, vacancy) eat up $60,000. That leaves $140,000 of NOI. Note: how much of those operating expenses actually fall on the landlord vs. get passed through to the tenant depends on the lease structure (NNN, MG, or FSG) — which is why cap rate underwriting starts with reading the rent roll and the leases.
The Worked Example, At a Glance
PURCHASE PRICE
$2,000,000
20,000 SF flex
GROSS RENT
$200,000
Annual income
OPEX
$60,000
Annual expenses
CAP RATE
7.0%
$140K NOI / $2M
$140,000 NOI divided by $2,000,000 price = 0.07, or a 7% cap rate. That's the deal in cap-rate terms.
The math is the easy part. The hard part is making sure your NOI is honest. I see brokers run "stabilized" or "pro forma" NOI on deals all the time, where they're projecting what the building could earn if you raised every rent to market, dropped vacancy to 5%, and kept expenses flat. That's not a real cap rate. Always run trailing-twelve-months (T-12) actual NOI when you're underwriting. If the seller's broker won't give you actuals, that's information in itself.
Use the calculator at the top of this page to flip between solving for cap rate, property value, or required NOI. Tap an asset-class preset to load typical 2026 ranges.
What Is a Good Cap Rate in 2026?
There's no universal "good" cap rate. A 5% cap on a trophy multifamily in a gateway market can be a great deal. A 5% cap on a tertiary-market strip center is a disaster. The right cap rate depends entirely on the asset class, the market tier, and the building's risk profile.
Here's where cap rates are landing in 2026, based on the deals we're seeing at The Cauble Group and the conversations I have with brokers and investors nationwide:
2026 Cap Rate Ranges by Asset Class
MULTIFAMILY CLASS A
4.5–6.0%
Lowest yields, most liquid
INDUSTRIAL BIG-BOX
5.5–7.0%
Long credit-tenant leases
CLASS A OFFICE (CBD)
6.0–8.0%
Re-pricing post-WFH
CLASS B OFFICE
8.5–11%
Highest yields, most risk
RETAIL (ANCHOR)
6.5–8.0%
Grocery, power center
NET LEASE (INV. GRADE)
5.0–6.5%
Single-tenant, credit-backed
Other asset classes: Medical Office runs 6.0–7.5% (long leases, strong credit). Self-Storage runs 5.5–7.0% (climate-controlled in growth markets compresses tighter). Industrial Flex runs 6.5–8.0%. Retail strip centers run 7.0–9.0%. Hospitality / hotels run 8–10%. Industrial outdoor storage (IOS) often trades at 7–9% depending on tenant credit and lease length.
A few patterns to notice. Multifamily and net lease compress tighter (lower cap rates, higher prices) because they're seen as lowest-risk and most liquid. Office is bifurcated: Class A in healthy CBDs still trades, but Class B office has gotten repriced hard since 2022. Industrial held up well through the 2022-2025 rate environment but has loosened slightly. Retail varies massively based on tenant mix and tenant credit.
Is a 5%, 6%, 7%, or 8% Cap Rate Good?
This is the question I get asked the most, so let me answer it directly for each band.
The Cap Rate Decoder
5% CAP
Premium
Trophy / net lease, low risk
6% CAP
Solid
Class A, healthy markets
7% CAP
Market
Stabilized, fairly priced
8%+ CAP
Risk or Reward
Value-add or distressed
What does a 5% cap rate mean? A 5 cap means you're paying 20 times the property's annual NOI. For every dollar of NOI, the property is worth $20. Five caps are common in trophy multifamily, net-lease deals with investment-grade tenants, and core industrial in gateway markets. You're paying a premium because the risk is low, the tenant is strong, the asset is liquid, and you expect rents to grow over time.
Is a 6% cap rate good for commercial real estate? In 2026, a 6 cap is solid for Class A office in a healthy CBD, anchor-tenant retail in a growth market, medical office with long leases, and well-located industrial. It's not aggressive, and it's not bargain-bin. For a value-add deal where you're going to push NOI 20–30% in the next two years, a 6 cap going-in can become an 8 cap stabilized, which is excellent.
Is a 7% cap rate good? A 7 cap is market for a lot of stabilized commercial assets right now: Class A suburban office, anchor retail centers, multi-tenant industrial flex, secondary-market multifamily. If the property is fully leased, the tenants are paying market rent, and operating expenses are dialed in, a 7 cap is a fair return for the risk. If you have to project pro forma NOI to get there, the real cap rate is lower.
Is an 8% cap rate good? An 8 cap usually signals one of two things: real risk (Class B/C office, secondary markets, older buildings) or a real opportunity (mismanaged building, below-market rents, deferred maintenance). The math doesn't tell you which one. That's what underwriting is for. My step-by-step underwriting guide walks through how to figure out which is which.
What about 9 or 10 caps? Above 9, you're almost always looking at a value-add or distressed deal, a property in a tertiary market, an older asset with deferred maintenance, or a hospitality/specialty asset. There's nothing wrong with chasing those yields, but the work to capture them is real. Don't buy a 9 cap and expect it to behave like a 9 cap if you don't lift a finger.
Cap Rate vs. Cash-on-Cash, IRR, and NOI
Cap rate is one of three or four metrics you should be running on every deal. It's not the most important one for most investors. Here's how they fit together:
NOI is the foundation. Every other metric is calculated from it. Get this number right (actuals, not pro forma) and the rest of your underwriting is on solid ground.
Cap rate tells you the unleveraged yield. It's useful for comparing deals apples-to-apples, especially across asset classes and markets. But it ignores financing, so it doesn't tell you what you'll actually earn on your cash.
Cash-on-cash return is the annual cash flow you earn after debt service, divided by the equity you put in. This is what your money is actually making in year one. On a 7-cap deal with 70% leverage at 6.5% interest, your cash-on-cash might be 8–11% depending on terms.
IRR (internal rate of return) is the time-weighted return on your investment over the full hold. It accounts for the purchase, ongoing cash flow, NOI growth, and the sale. This is the number sophisticated investors care most about because it includes when you get your money back, not just how much.
A trophy 5-cap deal can have a worse IRR than a value-add 8-cap deal once you factor in NOI growth and capital appreciation. That's why I tell new investors to learn cap rate first, but never let it be the only metric they look at. If this is your first deal, our complete walkthrough on how to buy your first commercial property shows how cap rate fits into the full underwriting flow alongside cash-on-cash, IRR, and debt service coverage.
Cap rate gets you the same yield no matter how you finance the deal. Cash-on-cash tells you what you actually keep. IRR tells you what you make over the whole hold. Run all three. Trust none of them alone.
Common Mistakes to Avoid
Accepting pro forma NOI as gospel. Brokers love to show "stabilized" cap rates that assume every unit is leased at market, expenses are perfectly managed, and reserves don't exist. Run T-12 actuals. The gap between actual and pro forma is where the value-add lives, but you should know what the gap actually is.
Comparing cap rates across asset classes without context. A 7-cap industrial deal and a 7-cap retail deal aren't the same thing. The tenant credit, lease length, capital expenditure profile, and risk are completely different. Cap rate is a starting point for comparison, not the comparison itself.
Pro Forma vs. Actual: The Same Deal, Two Stories
PRO FORMA (BROKER)
8.0% Cap
$160K NOI on $2M
"Stabilized" rents, 5% vacancy, no reserves
T-12 ACTUAL
5.5% Cap
$110K NOI on $2M
Real rents, real vacancy, real reserves
Same building. Same price. $50K of imaginary NOI separates a "good" deal from an overpriced one.
Ignoring NOI growth. A property with flat NOI at a 7 cap is worth less in 10 years than a property with 3% NOI growth at the same cap. Cap rate is a snapshot. The trajectory matters more than the number on day one.
Forgetting reserves and capex. Real NOI accounts for replacement reserves (roof, HVAC, parking lot). Sellers often show NOI without reserves, which inflates the number and lowers the apparent cap rate. Bake in 5–10% of gross income for reserves before you compare.
Confusing cap rate with cash-on-cash. Cap rate is unleveraged. Cash-on-cash is leveraged. Two different metrics measuring two different things. A new investor saying "I want a 10% cap rate" usually means they want a 10% cash-on-cash return, which is a totally different math problem.
Cap Rate FAQ
What is a cap rate in commercial real estate?
A cap rate (capitalization rate) is the unleveraged annual return a commercial property produces, calculated as Net Operating Income (NOI) divided by property value, expressed as a percentage. A $1,000,000 building generating $80,000 in annual NOI has an 8% cap rate. It represents the property's yield if purchased entirely with cash.
What is a good cap rate for commercial real estate in 2026?
Good cap rates depend on asset class and market: Class A multifamily 4.5-6.0%, industrial big-box 5.5-7.0%, Class A office CBD 6.0-8.0%, Class A office suburban 8.0%, Class B office 8.5-11%, retail anchor 6.5-8.0%, retail strip centers 7.0-9.0%, net lease investment grade 5.0-6.5%, medical office 6.0-7.5%, self-storage 5.5-7.0%, hospitality 8-10%.
Is a 5% cap rate good?
A 5% cap rate is generally considered premium - common in trophy multifamily, net-lease deals with investment-grade tenants, and core industrial in gateway markets. You're paying 20 times annual NOI because the asset is low-risk, the tenant is strong, and the asset is liquid. 5 caps are excellent for stabilized, low-risk plays but rarely make sense for value-add.
Is a 7% cap rate good?
A 7% cap rate is market for many stabilized commercial assets in 2026: Class A suburban office, anchor retail centers, multi-tenant industrial flex, and secondary-market multifamily. If the property is fully leased at market rents with dialed-in expenses, a 7 cap is fair compensation for the risk. If pro forma NOI is required to hit the 7 cap, the real (trailing) cap rate is lower.
Is a 10% cap rate good?
A 10% cap rate usually signals one of two things: real risk (Class B/C office, secondary markets, older buildings with deferred maintenance) or real opportunity (mismanaged building, below-market rents, value-add potential). The math doesn't tell you which. Above 9%, you're typically looking at value-add or distressed deals where execution risk is high but upside can be substantial.
How do you calculate cap rate?
Cap Rate = Net Operating Income (NOI) divided by Property Value, multiplied by 100. Calculate NOI by subtracting operating expenses (taxes, insurance, management, maintenance, vacancy) from gross rental income. Example: a 20,000 SF building generating $200,000 in gross rent with $60,000 in operating expenses has $140,000 NOI. At a $2,000,000 purchase price, that's a 7% cap rate ($140,000 divided by $2,000,000).
What does a 7.5% cap rate mean?
A 7.5% cap rate means the property's annual net operating income equals 7.5% of its purchase price. If the property sells for $1,000,000, the NOI is $75,000 per year ($1,000,000 multiplied by 0.075). It also implies a price-to-NOI multiple of 13.3x ($1,000,000 divided by $75,000).
Key Takeaways
Cap rate = NOI ÷ Property Value. A 7% cap on $140,000 NOI is a $2,000,000 property. Same building at a 6 cap is worth $2,333,333.
Cap rate is unleveraged. It doesn't tell you what you'll actually earn on your cash once you add financing. That's cash-on-cash return.
"Good" depends on asset class. A 5 cap is great for trophy multifamily. A 5 cap on a Class B office in a tertiary market is a problem.
Always use actual NOI, not pro forma. If the broker won't share T-12 actuals, that's a red flag worth a conversation.
NOI growth and value-add potential matter more than the going-in cap rate. A 6 cap that becomes an 8 cap in two years beats an 8 cap that stays flat.
Run cap rate, cash-on-cash, and IRR on every deal. They each tell you something different. None of them on its own is enough.
For more deal walkthroughs, market commentary, and underwriting tutorials, check out the Tyler Cauble YouTube channel and The Commercial Real Estate Investor Podcast.
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