The capitalization rate (cap rate) is the unlevered annual yield a commercial property produces based on its current net operating income and purchase price. It's the fastest way to compare one deal to another on an apples-to-apples basis.
Cap Rate = Net Operating Income (NOI) / Purchase PriceA Nashville retail strip that produces $126,000 of NOI and sells for $1,800,000 trades at a 7% cap rate.
Tyler's take
I've underwritten thousands of deals in Nashville and the Southeast, and cap rate is still the first number I look at, but it's also the most misunderstood number in commercial real estate. People treat it like a grade when it's actually a snapshot. A 5% cap rate isn't "bad" and an 8% cap rate isn't "good." They describe two completely different risk profiles, and the right one depends on the asset, the market, and what you're trying to accomplish.
When I'm walking a new CRE Accelerator member through their first deal, I make them memorize one thing: cap rate inverts. Low cap rate means a high price relative to income (expensive, lower return, typically lower risk). High cap rate means a low price relative to income (cheaper, higher return, typically higher risk). Once that clicks, you stop asking "what's a good cap rate" and start asking "is this cap rate appropriate for this asset in this market."
How to calculate it
Start with the NOI. Gross income minus vacancy minus operating expenses. Do NOT subtract debt service, capex, or depreciation. NOI is the property's operating yield, not the investor's yield.
Divide by the price. Purchase price (or current market value for an existing owner).
Multiply by 100 to express as a percentage.
Worked example: 8-unit Nashville retail strip, $1,800,000 asking. Gross rent $180,000. Vacancy and credit loss 5% ($9,000). Operating expenses $45,000. NOI = $180,000 − $9,000 − $45,000 = $126,000. Cap rate = $126,000 / $1,800,000 = 7.0%.
2026 Nashville benchmarks
Asset type Cap rate range:
Class A multifamily 4.75% - 5.50%
Grocery-anchored retail 5.75% - 6.75%
Unanchored strip retail 7.00% - 8.25%
Industrial / flex 6.25% - 7.50%
Single-tenant NNN (IG credit) 5.00% - 6.25%
Common mistakes
Using pro forma NOI instead of trailing 12. Brokers love pro forma. Lenders and serious buyers underwrite T-12.
Forgetting capex reserves and management fees when building NOI.
Comparing cap rates across markets without adjusting for risk.
Confusing cap rate with cash-on-cash return. Cap rate is unlevered. Cash-on-cash includes your loan.
FAQs
What's considered a good cap rate in 2026? There's no universal answer. In Nashville, a stabilized multifamily deal at 5% is market. A value-add retail strip at 8% might also be market. Compare to recent comparable sales, not to a rule of thumb.
Does cap rate include the mortgage? No. Cap rate is unlevered. If you want a metric that includes financing, use cash-on-cash return or levered IRR.
How do interest rates affect cap rates? Cap rates generally move with interest rates, though with a lag. When rates rise, cap rates eventually expand and values drop, all else equal.