Table of Contents
1. The Cap Rate Formula
The formula is simple. The work is in getting each input right:
Basic Formula
Alternative Uses
Example Calculation
A retail building generates $600,000 NOI and is listed for $12,000,000:
Calculate Your Property's Cap Rate
Our free calculator solves for cap rate, NOI, or property value.
2. NYC Cap Rate Benchmarks by Property Type
Cap rates move with property type, location, building quality, and the market. These are the NYC benchmarks as of 2024:
Current NYC Cap Rates (2024)
Note: Cap rates fluctuate with interest rates, market conditions, and investor sentiment. These are general ranges, and specific properties can trade outside them.
3. What Affects Cap Rates
Where a property lands on the cap rate range depends on these factors:
Lower Cap Rates
(Higher prices)
- • Prime locations
- • Strong credit tenants
- • Long lease terms
- • New/renovated buildings
- • Below-market rents (upside)
- • Low vacancy risk
Higher Cap Rates
(Lower prices)
- • Secondary locations
- • Weaker tenant credit
- • Short lease terms / vacancy
- • Older buildings / deferred maintenance
- • Above-market rents
- • Operational challenges
Macro Factors
- Interest Rates: Higher rates generally push cap rates up as investors require higher returns
- Capital Availability: More available capital compresses cap rates through competition
- Economic Growth: Strong economies support lower cap rates through rent growth expectations
- Risk Perception: Uncertainty drives investors to demand higher returns (higher caps)
4. Using Cap Rates in Investment Analysis
Investors use cap rates in four ways:
Property Comparison
Compare properties of different sizes and prices on an equal footing. A $50M building at 5% and a $10M building at 5% return the same share of the price in income.
Quick Valuation
Estimate property value by dividing NOI by market cap rate. If similar properties trade at 5% and your building has $500K NOI, estimated value is ~$10M.
Market Timing
Watch the cap rate trend to read the cycle. Compressing cap rates mean the market is heating up; expanding caps point to cooling or a correction.
Return Analysis
Going-in cap rate represents Year 1 unleveraged return. Compare it with your required return and your cost of capital to decide whether the deal works.
5. Limitations of Cap Rates
Cap rates are useful, but they leave a lot out:
- ✕Ignores Financing: Cap rate is unleveraged, so your actual return depends heavily on loan terms
- ✕Static Snapshot: Uses current NOI; doesn't capture growth potential or lease rollovers
- ✕NOI Inconsistency: Different sellers calculate NOI differently; always verify assumptions
- ✕Excludes CapEx: Doesn't account for capital expenditure needs or reserves
- ✕One Metric: Should be used alongside IRR, cash-on-cash, and other metrics
Best Practice: Use the cap rate to screen and compare. Before you commit money, build a full pro forma with cash flows, debt service, and exit assumptions. Try our Cap Rate Calculator andNOI Calculator for analysis.
6. Frequently Asked Questions
What is a cap rate in real estate?
A cap rate (capitalization rate) is a property's Net Operating Income (NOI) divided by its value or purchase price: Cap Rate = NOI / Property Value. It lets investors compare properties and size up returns before financing enters the picture.
What is a good cap rate in NYC?
NYC cap rates typically run from 4% to 7%, depending on property type and location. Trophy office and prime retail trade at 4-5%, multifamily at 4.5-5.5%, and mixed-use/value-add properties at 5.5-7%. A lower cap rate means buyers see less risk and there is more demand for the asset.
Why are NYC cap rates so low compared to other markets?
NYC cap rates stay low because domestic and international investors compete for the same buildings, land is limited, tenant demand is strong, values tend to appreciate, and the city is treated as a safe haven. Investors take a lower yield in exchange for that safety and the appreciation.
Is a higher or lower cap rate better?
It depends on your strategy. A lower cap rate means a higher price, usually for a safer, more stable property. A higher cap rate buys more income per dollar, usually with more risk attached (weaker tenants, older buildings, secondary locations). Neither one is "better." Pick the risk and return that fit your goals.
Why are NYC cap rates lower than other cities?
NYC cap rates are low because of heavy domestic and international investor demand, tight land supply, a long record of appreciation, deep tenant demand, liquidity, and the city's standing as a safe haven. Investors give up current yield for stability and the chance of appreciation.
What's the difference between cap rate and yield?
Cap rate specifically refers to NOI/Value (unleveraged). "Yield" can mean different things: cash-on-cash yield (cash flow/equity invested), dividend yield, or sometimes cap rate itself. Always ask which yield someone means.
How do interest rates affect cap rates?
Higher interest rates typically push cap rates up. When borrowing costs rise, investors need a higher return from the property to keep a workable spread. Historically, cap rates track about 200-400 basis points above 10-year Treasury yields, though this spread varies.