“Cap Rate, NOI, and Value—What Every Property Owner Should Know”
How Does Commercial Real Estate Denote Value?
Whether you’re new to commercial real estate or looking to sharpen your understanding of key investment metrics, three terms you'll hear often are: Cap Rate, NOI (Net Operating Income), and Value. On the surface, they might sound like buzzwords tossed around in the commercial space—but in reality, they’re the foundation of how a property is evaluated, bought, sold, and financed.
📊 What is NOI (Net Operating Income)?
Net Operating Income (NOI) is the annual income a property generates after operating expenses are deducted—but before debt service and taxes. It's the heartbeat of commercial real estate. Simply put, NOI reflects a property's profitability from its core operations.
Example:
If a property generates $500,000 annually from rent and other income sources (like parking or fees), and has $200,000 in operating expenses (maintenance, management, vacancy loss, etc.), the NOI is:
$500,000 - $200,000 = $300,000
📉 What is Cap Rate?
Cap Rate (short for Capitalization Rate) is the return an investor would expect based on the income the property generates. It’s calculated using this formula:
Cap Rate = NOI / Property Value
A higher cap rate typically means more risk—but also higher potential returns. A lower cap rate usually signals a more stable or in-demand asset.
Example:
If a property has an NOI of $300,000 and is valued at $6,000,000:
$300,000 ÷ $6,000,000 = 5% cap rate
🧮 How Is Value Calculated?
Once you understand NOI and Cap Rate, you can estimate a property’s value using this formula:
Value = NOI / Cap Rate
Example:
Let’s say the market cap rate in your area is 5%, and your property has an NOI of $300,000:
$300,000 ÷ 0.05 = $6,000,000
💡 Why Does This Matter?
For Owners: Improving your NOI—by increasing rents, reducing expenses, or both—can directly increase your property’s value.
For Investors: Knowing these basics helps you spot undervalued or value-add opportunities. If a property has below-market rents, acquiring it and adjusting the income can increase its value in months.
For Tenants & Buyers: Understanding these metrics puts you in a better position during negotiations.
🗣 Final Thoughts
When I first started in commercial real estate, I didn’t fully understand why NOI was so important—or how cap rates really worked. No one ever broke it down for me in plain terms. That’s why I’m writing these posts: to share what I’ve learned in a way that’s accessible and real.
NOI, cap rate, and value are just the tip of the iceberg. I’ll be diving deeper into more topics in future blogs, but if you ever need help or want a valuation from a local expert, I’m always happy to chat.
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Matthew Parker
Commercial Broker | Bray Commercial
Grand Junction, CO