How to Analyze Cap Rate for Commercial Properties
- Nate Jones, CPCU, ARM, CLCS, AU
- Oct 15
- 2 min read
When evaluating a commercial property, one of the first metrics investors look at is the capitalization rate, or cap rate. It’s a simple yet powerful tool that helps you assess the potential return on investment (ROI) based on a property’s income and value.
What Is Cap Rate?
Cap rate is the unleveraged annual return you’d earn if you bought a property with cash. It’s calculated using the formula:
Cap Rate = Net Operating Income (NOI) ÷ Property Value
For example, if a property generates $100,000 in NOI and is valued at $1,500,000, the cap rate is:
Cap Rate = $100,000 ÷ $1,500,000 = 6.67%
This percentage reflects the property’s income-generating potential relative to its price.
How to Calculate NOI
To calculate cap rate accurately, you need a reliable Net Operating Income figure. Here's how:
Gross Potential Income – Total rent and other income at full occupancy
Minus Vacancy & Credit Losses – Adjust for unoccupied units or unpaid rent
Equals Effective Gross Income (EGI)
Minus Operating Expenses – Includes taxes, insurance, maintenance, utilities, and management fees
Equals NOI
What Is a Good Cap Rate?
There’s no universal “good” cap rate—it depends on the property type, location, and market conditions. Here are general ranges:
Multifamily: 4%–6.5%
Industrial: 5.5%–7.5%
Retail: 6.4%–6.65%
Office: 8%+ (Class A), up to 12% (Class C)
Hotels: 3.3%–10.6%
Lower cap rates often indicate lower risk and higher demand, while higher cap rates suggest greater risk but potentially higher returns.
Why Cap Rate Matters
Quick Comparison Tool – Helps compare properties across markets
Risk Indicator – Higher cap rate = higher perceived risk
Valuation Metric – Can help estimate property value based on income
However, cap rate doesn’t account for financing, future cash flows, or appreciation—so it should be used alongside other metrics like IRR and cash-on-cash return.
Protect Your Investment with Wexford Insurance
Whether you're investing in apartments, office buildings, warehouses, retail spaces, or mixed-use developments, Wexford Insurance offers customized commercial property coverage to protect your cash flow and long-term ROI.
Our policies include:
Lessors risk insurance
Business interruption insurance
Optional add-ons like flood, cyber, and ordinance coverage
Final Thoughts
Cap rate is a foundational metric for evaluating commercial real estate—but it’s only part of the picture. Combine smart analysis with strong insurance coverage to protect your returns. Contact Wexford Insurance today to get tailored protection for your commercial property.
FAQs
1. Is cap rate the same as ROI?
No—cap rate reflects unleveraged return based on income and value, while ROI includes financing and appreciation.
2. Can cap rate help me compare properties in different states?
Yes, but always consider local market conditions and risk profiles.
3. Does Wexford Insurance cover all commercial property types?
Yes, including multifamily, office, retail, industrial, hotels, and mixed-use buildings.
