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Home  >  Commercial Mortgage Loan Center  >  Calculating a CAP Rate


Calculating a CAP Rate for Commercial Real Estate Financing

When applying for a commercial real estate loan in is helpful to have an idea what the value of your commercial income producing property is. The following is the method of calculating a CAP rate.

Direct Capitalization (CAP) is a method used to convert a property's annual income, into an estimate of the property's  value.

Direct Capitalization Rate Calculation

The Direct Capitalization Rate (CAP Rate) is defined as follows:

Value =      Net Operating Income   
              Overall Capitalization Rate

For Example:

V = $3,913,043
NOI = 450,000
CAP Rate = .115

$3,913,043 = $450,000

The CAP Rate in the above example is 11.5% (.115 X 100 = 11.5)

Other derivatives of the formula are as follows:

Net Operating Income = Overall Capitalization Rate X Value

Overall Capitalization Rate = Net Operating Income

The formula for calculating Net Operating Income is as follows:

Potential gross income (all figures are on a annual basis)

    Scheduled rent                            $xxxx
    Other income                              $xxxx

Total potential gross income                                        $xxxx
Vacancy and collection loss                                          -xxx

Effective gross income                                                $xxxx

Operating expenses

    Fixed                                           $xx
    Variable                                       $xx
    Replacement allowance                   $xx

Total operating expenses                                           -$xxxx

NET OPERATING INCOME                                             $XXXX

CommercialBanc uses this basic method of valuing a property when pre- qualifying a commercial loan request. When applying for a commercial real estate loan of apartment loan, please have income and expense information available.

To learn more about CommercialBanc's commercial real estate loan and apartment loan programs contact a commercial mortgage loan specialist at

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Any unauthorized use is strictly prohibited. If you would like to reprint this article for use on a commercial website, please contact CommercialBanc for more information.


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