What is a good cap rate for commercial property and how do I calculate it?

A cap rate is net operating income divided by price: a property with 500,000 dollars of NOI bought for 8 million dollars has a 6.25 percent cap rate. There is no single good cap rate. A good one is at or above what similar properties in the same market have recently traded at, given the same risk, and above your cost of debt if you plan to use leverage. How to calculate it correctly - Use net operating income: rents and other income, minus vacancy, minus operating expenses. Do not subtract debt service or depreciation. - Use the income in place for the going-in cap rate. A cap rate on the seller's pro forma NOI is a different number and should be labeled. - Use the full price, including any credits or assumed costs. What moves a cap rate - Property type: industrial and multifamily often trade at lower cap rates than office or retail. - Location and quality: stronger markets and newer buildings trade at lower cap rates. - Lease term and tenant credit: long leases to strong tenants lower the cap rate. - Interest rates: when debt costs rise, buyers need higher cap rates for deals to work. How to judge a deal's cap rate 1. Find recent arm's-length sales of similar properties nearby. 2. Compute their cap rates on in-place income where you can. 3. Compare the deal's going-in cap rate to that range, and to your loan rate. 4. Check whether the gap is explained by risk: vacancy, short leases, deferred work. Titleman computes the going-in cap rate from your rent roll and the comps it pulls, and shows each sale it used with its date. See how: https://titleman.ai/products/deal-review