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Calculate the capitalization rate to evaluate property investment returns and compare market opportunities.
Cap Rate = NOI / Purchase Price × 100
The capitalization rate, or cap rate, measures the annual return on a commercial real estate investment before financing costs. It represents the relationship between a property's net operating income (NOI) and its purchase price. A 6.0% cap rate means the property generates $6 of NOI for every $100 of value.
For triple net lease investors, the cap rate is the primary valuation tool. Since NNN tenants pay taxes, insurance, and maintenance, the property's NOI is essentially the base rent collected. This makes cap rate calculations straightforward and comparisons between NNN properties reliable.
Cap Rate = Net Operating Income / Purchase Price x 100A property with $180,000 in annual NOI and a $3,000,000 purchase price has a 6.0% cap rate. If you know the NOI and your target cap rate, you can also reverse the formula to find what a property should be worth: Property Value = NOI / Cap Rate. At a 6.0% target, that $180,000 NOI property is worth $3,000,000. At a 7.0% cap rate, the same income stream is worth $2,571,429.
Cap rates vary significantly across property types and tenant credit quality. Higher cap rates indicate higher risk and higher yield. Lower cap rates signal lower risk and higher pricing. Current NNN ranges as of early 2026:
| Sector | Cap Rate Range | Typical Tenant |
|---|---|---|
| Quick-Service Restaurants | 4.5-5.5% | Chick-fil-A, Starbucks, McDonald's |
| Medical Office | 5.5-6.5% | DaVita, Fresenius, Aspen Dental |
| Industrial NNN | 5.0-6.0% | FedEx, Amazon, UPS |
| Investment-Grade Retail | 5.5-6.5% | Dollar General, CVS, Walgreens |
| Strip Centers (Anchored) | 6.25-7.50% | Multi-tenant, Dollar Tree anchor |
| Non-Credit / Short-Term | 7.0-9.0% | Local operators, franchisees |
Track current benchmarks on the average cap rates page and the cap rate spread to 10-Year Treasury.
There is no universal "good" cap rate. It depends on the risk profile, location, tenant credit, and the current interest rate environment. A 5.5% cap rate on an investment-grade NNN retail property is strong when the 10-Year Treasury yields 4.0%, because the 150 basis point spread compensates for the illiquidity of real estate. That same 5.5% may look thin if rates rise to 5.5%.
For NNN investors, the key comparison is the cap rate spread over Treasuries. Historically, NNN properties have traded 250-400 basis points above the 10-Year. When spreads compress below 200 bps, the market is pricing in growth expectations or risk reduction that may not materialize.
Divide the property's annual net operating income (NOI) by the purchase price, then multiply by 100. A property earning $150,000 NOI purchased for $2.5M has a 6.0% cap rate.
Higher cap rates mean higher yields but also higher risk. A 7.5% cap rate on a non-credit tenant reflects more uncertainty than a 5.5% cap rate on an investment-grade NNN property. The right cap rate depends on your risk tolerance and return requirements.
In 2026, investment-grade NNN retail trades at 5.5-6.5%, medical office at 5.5-6.5%, and industrial at 5.0-6.0%. Non-credit and short-term leases price at 7.0-9.0%. Compare against the 10-Year Treasury yield to assess relative value.
Cap rate measures unlevered return (before financing). Cash-on-cash measures your actual return on the equity invested after debt service. A property with a 6.0% cap rate might generate 8-10% cash-on-cash when financed with favorable debt terms.
No. Cap rate is calculated before financing costs. It measures the property's intrinsic yield independent of how the purchase is funded. Use the DSCR calculator to evaluate the impact of debt on your returns.