Investing
What Is a Cap Rate in Commercial Real Estate?
Cap rate is a property’s net operating income divided by its price. It compares properties before debt. Cash return and a formal appraisal are separate questions.
Quick answer
Cap rate equals annual NOI divided by property price. A building with $96,000 of NOI priced at $1,200,000 has an 8% cap rate. The ratio ignores debt, income taxes, and future repairs.
Key takeaways
- Cap rate = NOI ÷ price.
- A higher cap rate is not automatically a better buy. It can be compensation for risk.
- Debt changes your cash return without changing the cap rate.
- Omaha and Lincoln do not share one published cap rate on this site.
The formula
NOI ÷ price
Multiply by 100 if you want the result in percent. Use the same year’s income the buyer is willing to underwrite, and say which year it is.
NOI is income after operating expenses and before debt service. If you divide the wrong income number by price, the cap rate looks precise and is not. The companion piece is how to calculate NOI.
| Input | Amount |
|---|---|
| Annual NOI | $96,000 |
| Price | $1,200,000 |
| Cap rate | 8.00% |
You can reverse it. If a buyer will pay an 8% cap rate for that income, the indicated price is NOI divided by 0.08, or $1,200,000. That is arithmetic. It becomes a value opinion only after someone defends the NOI and the rate. A licensed appraiser prepares a formal appraisal.
What a cap rate is good for
Investors use cap rates to compare the income yield of buildings before debt. A leased warehouse and a leased shop can be placed side by side if the NOI is built the same way. The investment property page is the longer version of that comparison.
Sellers use the same math to see what a price implies. If you want $1,500,000 and the defensible NOI is $96,000, the asking cap rate is 6.4%. Buyers will ask why that income deserves a lower rate than the last building they toured. That is a positioning question, which is covered on the sell page.
What it leaves out
- Debt service and the cash you must bring to closing
- Income taxes and depreciation
- Capital repairs that were kept out of operating expenses
- A lease that expires next year
- Vacancy you assumed away
Cash-on-cash return picks up the debt and the cash invested. Read cash-on-cash return when the loan is the point. Cap rate will not change just because you borrowed more.
Omaha, Lincoln, and the missing average
People ask for “the Omaha cap rate” or “the Lincoln cap rate.” There isn’t one number that describes both cities, or even one property type inside one city. Industrial, office, retail, and multifamily are not priced on the same risk. This site will not invent an average.
Use the cap rate calculator with the NOI and price you actually have. Then read the building: Omaha and Lincoln change the tenant, the expenses, and the sales you might compare. They do not change the formula.
Questions people ask
Is a higher cap rate better?
It means more NOI per dollar of price. It can also mean the income is riskier, shorter, or expensive to keep. Better is the building that matches the risk you meant to take.
Do I use trailing NOI or next year’s NOI?
Say which one you are using. Trailing NOI is what happened. A future NOI is a forecast. Mixing them makes the comparison false.
Does cap rate include the mortgage?
No. That is why two buyers can agree on cap rate and disagree on cash-on-cash return.
Is this an appraisal method?
Appraisers may use a related income approach. This page and the calculator show the arithmetic so you can talk about a specific property with better questions.
Written by Bryan Robinson, a Professional Sales Agent with NHS Commercial, licensed in nebraska.
Want help evaluating a commercial property?
Call or text Bryan at 402-521-3000 to talk through a specific property.
Bryan Robinson
NHS Commercial
Professional Sales Agent | Licensed in Nebraska