Question 1

Why doesn’t the mortgage payment factor into NOI?

Accepted Answer

Cap rate is deliberately an unlevered measure — it evaluates the property’s own income-producing ability independent of how any particular buyer chooses to finance it. Including the mortgage would make the same property show a different cap rate for a cash buyer versus a heavily financed one, which defeats the purpose of comparing properties on equal footing.

Question 2

What’s a "good" cap rate?

Accepted Answer

It depends entirely on the market, property type, and risk profile — a stabilized property in a prime market might trade at a 4-5% cap rate, while a higher-risk property in a secondary market might need to offer 8-10%+ to attract buyers. Lower cap rates generally mean the market is pricing in lower risk (or more appreciation potential), not simply a "better deal."

Question 3

How is the implied value at a target cap rate useful?

Accepted Answer

It’s a quick way to sanity-check an asking price: dividing NOI by your target cap rate gives the price at which the property would trade at that cap rate. If the asking price is well above that implied value, the deal is priced for a lower cap rate (and lower yield) than you’re targeting.

Commercial Real Estate Cap Rate Calculator

Cap rate from NOI

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