How to Calculate Cap Rate Step-by-Step
A practical, no-fluff walkthrough of calculating cap rate on a commercial real estate deal — from gathering inputs to interpreting the result.
The cap rate formula
Core formula
Cap Rate = NOI ÷ Purchase Price × 100
Where NOI = Gross Revenue − Operating Expenses
The formula is simple. The challenge is getting the inputs right. Each step below walks you through gathering accurate data and avoiding the mistakes that lead to unreliable cap rate calculations.
Step-by-step cap rate calculation
Calculate gross revenue
Add up all rental income from every tenant on an annual basis. For NNN leases, include base rent plus any CAM reimbursements the tenants pay. For gross leases, use the total rent received. Include other property income: parking fees, storage charges, antenna leases, vending — anything the property generates.
Use actual in-place rent from the current rent roll, not asking rents or projected market rates. Cap rate should reflect what the property is earning today.
Determine operating expenses
Compile all annual operating costs: property taxes, property insurance, common area maintenance and repairs, management fees (typically 3–6% of gross revenue), utilities (if landlord-paid), and replacement reserves. Use actual trailing expenses when available, or realistic estimates based on comparable properties.
Do NOT include debt service, mortgage payments, capital expenditures, tenant improvements, leasing commissions, depreciation, or income taxes. These are not operating expenses.
Calculate net operating income (NOI)
Subtract total operating expenses from gross revenue. The result is your NOI — the annual income the property generates from operations before financing costs. This is the most important number in the equation.
Gross Revenue: $750,000 − Operating Expenses: $225,000 = NOI: $525,000
Identify the purchase price
Use the actual purchase price for an acquisition you're evaluating, or the current market value for an existing holding. For valuation purposes, you can also work the formula in reverse: if you know the market cap rate, divide NOI by cap rate to estimate value.
If you're comparing to comparable sales, use the closed sale price — not the asking price or assessed value.
Divide NOI by price
This is the final calculation. Divide NOI by purchase price and multiply by 100 to express as a percentage. That's your cap rate.
$525,000 ÷ $7,500,000 = 0.07 × 100 = 7.0% Cap Rate
Interpret the result
Compare your cap rate to recent comparable sales in the same submarket and asset class. A cap rate significantly higher than comps may indicate risk factors (short lease term, tenant issues, deferred maintenance) or a potential bargain. A cap rate lower than comps suggests the seller is pricing in value that may or may not be justified.
Cap rate is a starting point. Follow up with DSCR, cash-on-cash return, and a full cash flow projection before making an investment decision.
Full example: industrial property cap rate
A 41,000 SF industrial property with three tenants, priced at $6,200,000.
Revenue
- Suite 101 (18,000 SF × $14.50)
- $261,000
- Suite 102 (12,000 SF × $15.25)
- $183,000
- Suite 201 (11,000 SF × $13.80)
- $151,800
- Parking income
- $18,000
- Gross revenue
- $613,800
Expenses
- Property taxes
- $52,000
- Insurance
- $22,000
- CAM / maintenance
- $38,000
- Management (5%)
- $30,690
- Reserves
- $12,000
- Total expenses
- $154,690
NOI = $613,800 − $154,690
= $459,110
Cap Rate = $459,110 ÷ $6,200,000
= 7.41%
At a 7.41% cap rate, this 41,000 SF industrial property with three tenants is priced within the typical range for secondary-market industrial in 2026. The 8,500 SF vacant suite (not included in revenue) represents upside — filling it at market rent would increase NOI and improve the cap rate on your purchase price.
Frequently asked questions
How do I calculate cap rate without NOI?
You can't — NOI is a required input. If you don't have a detailed expense breakdown, estimate operating expenses at 30–40% of gross revenue for NNN properties or 40–55% for gross lease properties. This gives you a rough NOI to calculate an approximate cap rate, but verify with actual expense data before making decisions.
Should I use trailing or pro forma NOI?
Use trailing (actual) NOI for the going-in cap rate — this reflects what the property is actually earning today. Use pro forma (projected) NOI to calculate the stabilized cap rate — what the property should earn at full occupancy and market rents. Be explicit about which you're using, as lenders and appraisers treat them differently.
What if the property has vacancy?
Calculate cap rate using actual in-place NOI, which already reflects the vacancy. This gives you the going-in cap rate. Then calculate a stabilized cap rate using projected NOI at full occupancy. The difference between the two shows the value-add opportunity.
Can I use cap rate to compare different property types?
You can, but with caution. Cap rates vary significantly by asset class because risk profiles differ. A 7% cap on an industrial property is a different risk proposition than a 7% cap on an office building. Compare cap rates within the same asset class and market for the most meaningful analysis.
How often should I recalculate cap rate?
Recalculate whenever NOI changes materially — new leases, rent increases, expense changes, or vacancy events. For existing holdings, an annual recalculation against current market cap rates tells you how your property's value has changed and informs hold/sell decisions.
Final thoughts
Calculating cap rate is straightforward — the challenge is getting clean inputs. Accurate NOI requires a real rent roll, verified operating expenses, and honest vacancy assumptions. Once you have those, cap rate is just arithmetic.
DealWise AI automates the entire process. Enter your property details and rent roll, and it calculates going-in cap rate, stabilized cap rate, and the projected path between them — no formulas, no spreadsheets, no room for error.
Related guides
What is cap rate?
Foundational guide to the cap rate metric.
What is NOI?
How to calculate the income that drives cap rate.
What is a good cap rate?
Current benchmarks by asset class.
Cap rate vs NOI explained
How these metrics work together.
Cap rate formula, example and calculator
Three worked deals, plus using cap rate in reverse to estimate value.
What is a rent roll?
The document every accurate NOI starts from.
The arithmetic is easy. The inputs are the work.
DealWise AI builds NOI from the rent roll itself — suite by suite, with escalations, reimbursements and rollover — so the cap rate on the page is the one the leases actually support. Free to start.