FINANCIAL MODELING
Cap Rate Calculator and Formula: A Practitioner's Guide
Free Cap Rate Calculator
Enter two of the three values below to solve for the third. The calculator works in both directions: input NOI and property value to get cap rate, or input NOI and cap rate to get implied value.
Want IRR, cash flow projections, debt sizing, and exit cap sensitivity on top of this? You can model it in Apers in minutes:try the multifamily acquisition model →
DO IT IN APERS
The cap rate calculation above is the simplest case, a single going-in number. Real underwriting needs going-in cap, exit cap, NOI build-up by line item, levered IRR, equity multiple, cash-on-cash, and a 2×2 sensitivity table on the exit assumption. You can build this in Excel by following the worked example below. In Apers,AQ-110, the Multifamily Acquisition Pocket Model, runs all of it on a single sheet from eight inputs in minutes. Try it →
What Cap Rate Actually Is
The capitalization rate (cap rate) is the ratio of a property's net operating income to its market value. It is the single most-quoted metric in commercial real estate because it answers the question every buyer asks first: what yield does this property produce on day one?
The formula is short:Cap Rate = NOI ÷ Property Value. A property generating $1,000,000 of NOI and trading at $20,000,000 carries a 5.0% cap rate. A property at the same NOI trading for $25,000,000 carries a 4.0% cap rate. Lower cap rate, higher price, lower yield, and typically lower perceived risk.
Cap rate is most useful as a basis indicator for stabilized, income-producing assets. It is least useful for properties undergoing major capital work, lease-up, or repositioning, where the in-place NOI doesn't reflect the stabilized economics. Knowing which case you're in, and what cap rate to use, is the difference between a useful first-pass screen and a misleading one.
THE 30-SECOND VERSION
Cap rate = NOI ÷ value. Use it to screen stabilized deals against market benchmarks. Don't use it to compare a value-add deal to a core deal: the in-place NOI on a value-add deal understates the stabilized economics, so the going-in cap looks worse than it is. For anything past screening, build the full cash flow.
The Cap Rate Formula
The cap rate formula has three rearrangements, all sides of the same equation:
- Cap Rate = NOI ÷ Property Value: the standard form, used when you know the price and want the yield.
- Property Value = NOI ÷ Cap Rate: used when you have an NOI and a market cap rate, and want the implied value.
- NOI = Property Value × Cap Rate: used when you have a target value and want the NOI required to justify it.
The hard part is not the formula. It's defining NOI correctly. Different practitioners include or exclude different line items, and small definitional differences can swing the cap rate by 25 basis points or more on the same deal. Standard NOI is gross revenue, less vacancy and credit loss, less operating expenses, with replacement reserves shown below the NOI line in this guide's convention.
The big disagreements: how to treat replacement reserves, whether management fees are at-market or in-house, whether tenant improvements and leasing commissions are above- or below-line, and how to normalize for one-time income (lease termination fees, settlement payments) and one-time expenses(storm damage, deferred maintenance). Two analysts can underwrite the same property and arrive at NOIs that differ by 5%, which translates to a 5% swing in implied value at the same cap rate.
Cap Rate Decomposition (Gordon Growth Model)
Where does a market cap rate come from? At the institutional level, cap rates are not arbitrary: they decompose into a build-up of three components: a risk-free baseline (typically the 10-year Treasury), a property-specific risk premium, and an offset for long-run NOI growth. The relationship comes from the Gordon Growth Model: cap rate = required return − long-run growth rate.
This decomposition matters because it tells you when cap rates are likely to move. A 100 bps move in the 10-year Treasury, holding risk premium and growth constant, shifts implied cap rates by 100 bps. That's why CRE valuations moved as dramatically as they did across 2022–2024: the risk-free leg of the build-up repriced violently. Risk premiums adjust more slowly; growth assumptions adjust slowest of all.
Worked Example: NOI Build-Up
A 180-unit garden-style multifamily property in Phoenix. The in-place rent roll shows gross potential rent of $2.7M. Other income (parking, laundry, pet fees) adds $135,000. Vacancy and credit loss is underwritten at 5.5% of gross potential rent: 5.0% vacancy (the market level, and also the in-place level) plus 50 bps of credit loss. Operating expenses total $1.32M, including a 3% property management fee on effective gross income ($80,595). Replacement reserves are $300/unit/year ($54,000), held below the NOI line. All inputs in this example are illustrative assumptions.
At an asking price of $27,300,000, the going-in cap rate is $1,366,500 ÷ $27,300,000 ≈ 5.0%. If the Phoenix submarket trades at an illustrative 5.25% for comparable assets, the deal is priced about 25 basis points inside the market: the buyer is paying a premium versus comps and needs to underwrite where that premium comes from (rent growth, expense compression, exit cap compression, or a story they're paying for).
Going-In Cap vs. Exit Cap
Going-in cap is computed on year-one stabilized NOI and the acquisition price. Exit cap is what the next buyer pays, applied to forward 12-month NOI (the year after your sale year), when you sell. Both matter, and they don't have to be the same number.
The relationship between going-in and exit cap rates encodes a deal's reversion risk. If you buy at a 5% going-in cap and underwrite to a 5.5% exit cap, you've assumed cap-rate expansion: the basis you're selling into is wider than the one you bought at. This is a conservative assumption in most environments. Buying at 5% and selling at 4.75% is cap-rate compression: you're betting the market gets tighter, which it sometimes does, but is a riskier underwrite to bring to investment committee.
A common underwriting convention (a practice used by many underwriters, not a rule) is to set exit cap 25–50 basis points wider than going-in for value-add deals, and flat to 25 bps wider for core deals. Wider spreads reflect the analyst's view on interest rate trajectory and supply-demand fundamentals at the projected exit date.
A FAST GUT-CHECK
If your underwriting requires cap-rate compression to clear the IRR hurdle, you're not buying a deal, you're buying a market call. That's not necessarily wrong, but it should be a deliberate decision flagged at IC, not a quiet input cell in row 47.
Seven Mistakes Practitioners Make
Cap rate is simple enough to weaponize against yourself. Seven errors we've seen kill deals (or worse, fund bad ones):
Conflating cap rate with yield on equity. Cap rate is an unlevered metric. Your actual equity yield depends on leverage, debt cost, and capital reserves. A 5.0% cap property with 65% LTV agency debt at a 6.0% all-in rate has negative leverage: the asset yields less than the debt costs, so the year-one equity yield (about 3.1% interest-only, about 0.9% with 30-year amortization, before reserves) falls below the 5.0% unlevered cap rate. It can persist for years if NOI growth doesn't outpace the debt cost gap. Cap rate alone hides it.
Using in-place NOI on a value-add or development deal. The going-in cap on a 50%-occupied value-add property is meaningless: the in-place NOI doesn't reflect the stabilized economics. Either underwrite a stabilized cap on the year-3 NOI projection, or skip cap rate entirely for these deals and underwrite on yield-on-cost and IRR. Cap rate is a stabilized-asset metric.
Treating going-in cap = exit cap. Holding cap rates constant from entry to exit is a ten-second underwriting shortcut that hides the deal's biggest assumption. Many shops expect 25–50 bps of exit cap expansion for value-add and flat-to-25-bps for core. If your model uses the same cap on both ends, you're implicitly betting the market environment in year 5 is identical to today.
Mixing reserve conventions. Some practitioners deduct $250–$400 per unit per year (a common rule of thumb) for capital reserves before computing NOI. Conventions differ: some broker comps and property-level reports show NOI before reserves, while many lenders deduct reserves to reach net cash flow. Whichever you use, state it, and compare cap rates only against comps on the same basis.
Pricing off a national cap rate when the deal is in a tertiary market. National benchmarks (NCREIF, MSCI RCA) are value-weighted toward larger institutional markets. A "5.25% multifamily core" benchmark can be meaningfully tighter than what's actually trading in your specific submarket. Use transaction-based, submarket-specific data: Real Capital Analytics's submarket cap rate publications, broker BOVs from recent transactions, or the appraisal comps for similar product.
Trusting the broker's NOI without normalizing it. Broker NOIs typically add back T-12 vacancy below market, treat one-time expenses as non-recurring, normalize management fees to a "market" rate even if the property is owner-managed, and assume rent growth that's already in the price. Always rebuild the NOI from the rent roll and T-12 yourself. Gaps of several percent between broker NOI and underwritten NOI are common.
Ignoring lease rollover in office and retail underwrites. A 7.5% in-place cap on an office building looks attractive until you discover 60% of the tenants roll within 24 months at rents 30% below market. The 7.5% is real today but expires when the leases do. The right metric for rollover-heavy assets is a stabilized cap computed on mark-to-market rents, modeled tenant-by-tenant in a rollover schedule, not a snapshot cap on in-place NOI.
What's a Good Cap Rate?
"Good" depends entirely on asset class, market, and strategy. With the 10-year Treasury at 4.57% on May 21, 2026, the broad ranges below are illustrative orientation ranges, not survey data:
- Multifamily core (gateway markets): 4.50%–5.25%
- Multifamily core-plus (secondary markets): 5.00%–5.75%
- Multifamily value-add: 5.50%–6.50% (stabilized or yield-on-cost target; in-place going-in caps are often lower)
- Industrial core (Tier 1 logistics): 4.75%–5.50%
- Suburban office (Class A): 7.00%–8.50%
- Anchored retail: 6.50%–7.75%
- Self-storage: 5.50%–6.50%
- Hospitality (full-service): 7.50%–9.00%
These ranges shift with the rate environment. The NCREIF Property Index publishes quarterly property data and is the standard appraisal-based benchmark for institutional property returns. Green Street and MSCI Real Capital Analytics publish transaction-based cap rate benchmarks that can lead the appraisal-based NCREIF index, which is useful when the market is repricing and appraisals haven't caught up. For markets without sufficient institutional transaction data, fall back to broker-published cap rate surveys from CBRE, JLL, and Cushman & Wakefield.
When Cap Rate Misleads
Cap rate is a snapshot. It says nothing about tomorrow's income, the path of cash flows, the financing structure, or the exit assumption. Three situations where cap rate, used alone, will lead you wrong:
The value-add trap
A 4.0% going-in cap on a property whose stabilized NOI implies a 6.5% return looks expensive on day one and cheap after the renovation lifts rents. The going-in cap rate captures the first part of the story and misses the second. For value-add deals, you need a multi-year cash flow model with renovation phasing: the going-in cap is almost beside the point.
The lease rollover ambush
An office building at a 7.5% in-place cap looks attractive until you notice 60% of the tenants roll in the next 24 months at 30% below-market rents. The 7.5% is a real number, but it expires when the leases do. The right metric is a stabilized cap on mark-to-market rents, computed in a per-tenant rollover model.
The cap rate ≠ yield confusion
Cap rate is an unlevered yield on price. Your actual yield as an equity investor depends on leverage, debt cost, capital reserves, and entry-exit cap rate spread. A 5% cap rate property with 65% LTV agency debt at 6% has negative leverage: the asset yields 5%, but the debt costs 6%, so the year-one equity yield (about 3.1% interest-only) falls below the cap rate. Cap rate is a useful indicator, but it's not the return on equity.
How to Model It
A first-pass cap rate analysis fits on a single Excel sheet. Five sections, in this order:
1. Rent roll and other income. Pull from the seller's rent roll PDF (or, if you have access, their property-management system export). Build a per-unit table with current rent, market rent, lease expiration, and concession status. Sum to gross potential rent. Add other-income line items (parking, laundry, pet fees, RUBS) separately.
2. Vacancy and credit loss. Use the higher of in-place vacancy or submarket average, then add 50 bps for credit loss (in the worked example, 5.0% plus 50 bps gives 5.5%). If the property is in lease-up, model a curve to stabilization rather than a flat number.
3. Operating expenses by line item. Build a 12-month operating expense schedule from the T-12 (or T-3 if the property has recent ownership changes). Normalize for one-time items. Compare your normalized OpEx to benchmark expense ratios for the asset class: if you're far under, you've missed something.
4. NOI subtotal. EGI minus OpEx equals NOI. Keep capital reserves below the line.
5. Going-in cap rate. NOI divided by the purchase price. Compare to the submarket benchmark to test whether the deal is priced inside or outside market. Separately compute yield on cost: NOI divided by price plus acquisition costs plus immediate-need CapEx.
For multifamily core/core-plus, this is exactly what the Apers AQ-110 Pocket Model does in minutes from eight inputs: rent roll, vacancy, OpEx ratio, growth rate, LTV, interest rate, exit cap, and purchase price. When the screen passes, the full AQ-111 Pro Forma extends the same logic into a 10-year monthly cash flow with unit-level rent rolls, bridge-to-perm debt, and IC-ready outputs. For ground-up development, where cap rate is a yield-on-cost target rather than a going-in basis, the DV-001Ground-Up Development Pro Forma handles the construction draws, capitalized interest, lease-up assumptions, and stabilized exit cap.
From Cap Rate to a Full Pro Forma
Cap rate gets you through the first 30 seconds of a deal. Past that, every serious underwrite requires the full cash flow: revenue projections, operating expenses, debt structure, equity returns, exit assumptions, and sensitivity tables on the inputs that move the answer.
Apers ships AQ-110, the Multifamily Acquisition Pocket Model, a single-sheet model that runs the full going-in cap, exit cap, NOI build-up, levered IRR, equity multiple, and a 2×2 sensitivity table from eight inputs in minutes. You can build the underlying logic in Excel by following the worked example above; in Apers, you build it in minutes and iterate from there.
When you graduate past screening, the same logic carries into AQ-111, the full Multifamily Core/Core-Plus Pro Forma: 10-year monthly cash flow, unit-level rent rolls, bridge-to-perm debt modeling, and IC-ready outputs.
Related Articles
The cap rate pillar links into the broader valuation cluster on Apers Learn. Sibling deep-dives:
- NOI Calculator and Formula: the line-by-line NOI build that sits under every cap rate.
- NOI: Institutional vs Broker Calculation: the definitional differences that move cap rates.
- Cap Rate Decomposition: the risk-free rate, risk premium and Gordon Growth build in depth.
- Going-In vs Exit Cap Rate: the spread and the reversion.
- IRR Calculator and Formula for Real Estate: what cap rate can't tell you, IRR can.
FAQ
Frequently Asked Questions
What is a cap rate in simple terms?
Cap rate is the ratio of a property's net operating income to its market value, expressed as a percentage. A property with $1M of NOI selling for $20M trades at a 5.0% cap rate. It's a quick way to compare the yield of one property to another without accounting for financing.
How do you calculate cap rate?
Divide net operating income (NOI) by property value. NOI is gross potential rent plus other income, less vacancy and credit loss, less operating expenses. The cap rate is expressed as a percentage. For example: $1,200,000 NOI ÷ $24,000,000 value = 5.00% cap rate.
What's the difference between going-in cap and exit cap?
Going-in cap rate is computed on year-one NOI and the acquisition price. Exit cap rate is what the next buyer pays, applied to forward 12-month NOI (the year after your sale year), when you sell. The spread between them captures your assumption about whether the market will tighten or widen during your hold period.
What's a good cap rate for multifamily?
In the illustrative ranges used in this guide, multifamily core in gateway markets runs about 4.50–5.25%. Core-plus in secondary markets is 5.00–5.75%. Value-add multifamily is often quoted at 5.50–6.50% on a stabilized or yield-on-cost basis, while in-place going-in caps are often lower, reflecting renovation risk and lease-up timing. These ranges shift with the rate environment, so check the NCREIF Property Index and current broker surveys for benchmarks.
Should cap rate be higher or lower?
Higher cap rates mean higher yield and typically higher perceived risk. Lower cap rates mean lower yield and typically lower perceived risk. Whether you want a high or low cap rate depends on your investment strategy. Core investors accept lower cap rates for stability; opportunistic investors target higher cap rates with more upside.
Does cap rate include debt?
No. Cap rate is an unlevered metric. It tells you the property's yield before financing. Your actual return as an equity investor depends on leverage, debt cost, and capital reserves. A 5% cap property financed with debt costing more than 5% has negative leverage: the levered year-one yield falls below the cap rate, and with amortizing debt it can approach zero.
How is cap rate different from IRR?
Cap rate is a single-year, point-in-time yield. IRR is the multi-year, time-weighted return on equity after debt service and including the sale proceeds. Cap rate is a screening metric; IRR is the answer to whether the deal actually works.
How do you calculate exit cap rate?
Exit cap rate is the cap rate you assume the next buyer will pay. You choose it, then compute exit value as forward 12-month NOI (the year after your sale year) divided by the exit cap. Many underwriters start from the going-in cap and add 25–50 bps for value-add deals or 0–25 bps for core, then test the result against current market evidence.
What is cap rate decomposition?
Cap rate decomposition splits a market cap rate into its components: risk-free rate (typically the 10-year Treasury) + property-specific risk premium − long-run NOI growth. The relationship comes from the Gordon Growth Model. The decomposition lets you test whether a given market cap is rich or cheap relative to underlying fundamentals.