"Cap rate" is the single most-searched term in commercial real estate, and for good reason — it's the fastest way to compare two properties that have nothing else in common. A $400,000 retail strip and a $4 million industrial building can't be compared on price alone, but their cap rates put them on the same scale.

The formula

Cap rate (capitalization rate) = Net Operating Income (NOI) ÷ Purchase Price. NOI is the property's annual income after operating expenses (taxes, insurance, maintenance, management) but before debt service — it's a measure of what the real estate itself produces, independent of how you financed it. A property producing $70,000 in NOI on a $1,000,000 purchase price has a 7% cap rate.

The relationship also runs in reverse, which is how cap rates get used to price a listing: Value = NOI ÷ Cap Rate. If comparable properties in a submarket are trading at a 6.5% cap rate and your building produces $130,000 in NOI, the market is telling you it's worth roughly $2 million.

What counts as a "good" cap rate right now

There's no single good number — it depends entirely on asset class, tenant credit, lease length, and location — but CBRE's H1 2026 U.S. Cap Rate Survey gives a useful national baseline. The all-property average cap rate held essentially flat in H1 2026 even though the 10-year Treasury yield rose to 4.67% by mid-May, which is notable because cap rates usually track Treasury yields upward. Within that flat average: neighborhood retail compressed the most of any property type (meaning prices rose relative to income), industrial saw meaningful compression as well, hotel cap rates compressed too, and Class B/C office saw some compression but with continued volatility — CBRE describes lower-quality office pricing as still "bouncing up and down from survey to survey." Investor sentiment shifted more cautious as the year went on: by June 2026 about 60% of respondents expected no near-term change, but more than in December 2025 were bracing for cap rates to rise rather than fall.

The practical takeaway for a Louisville or Southern Indiana buyer: a lower cap rate isn't automatically "worse" — it usually means the market sees less risk (strong tenant credit, long lease term, prime location, or a hot asset class like the industrial and neighborhood retail segments compressing nationally right now). A higher cap rate isn't automatically a "better deal" — it usually means more perceived risk, whether that's tenant credit, lease rollover, deferred maintenance, or a softer submarket.

Common cap rate mistakes

• Using gross income instead of NOI. Skipping operating expenses inflates the cap rate and overstates the return.
• Ignoring near-term lease rollover. A property with in-place NOI from a lease expiring in eight months isn't really priced on that NOI — it's priced on what happens next.
• Comparing cap rates across incompatible asset classes without adjusting. A 7% cap rate on a single-tenant industrial building and a 7% cap rate on a value-add retail center carry very different risk profiles.
• Treating cap rate as your investment return. Cap rate ignores financing entirely — your actual cash-on-cash return depends heavily on your debt terms, which is a separate calculation.

Run the numbers on your own deal

Our investment property analyzer calculates cap rate, cash-on-cash return, and other underwriting metrics directly from a property's numbers — useful whether you're screening a listing or double-checking a broker's pitch.

What we look at with you

Before you anchor to a cap rate, we walk through where the NOI actually comes from (in-place rents vs. market rents), how much lease term is left on any material tenants, what capital expenditures are coming due, and how comparable sales in that specific Louisville or Southern Indiana submarket are actually trading — not just the national average.

Cap rates across asset classes we work in

See how this plays out by asset class: office, retail, industrial & warehouse, multifamily, and healthcare & medical office, or start from the commercial real estate hub.

Frequently asked questions

What's a good cap rate for a first-time commercial buyer?

There's no universal number, but higher cap rates (7%+) generally come with more risk to manage (tenant credit, lease rollover, deferred maintenance), while lower cap rates (sub-6%) generally reflect stronger tenant credit and longer leases with less hands-on risk. First-time buyers often do better prioritizing lease quality over chasing the highest number.

Does cap rate account for my mortgage payment?

No. Cap rate is calculated before debt service, so it measures the property's own performance independent of financing. Your actual return after a mortgage is a separate calculation (cash-on-cash return).

Why did cap rates stay flat even though interest rates rose in 2026?

Per CBRE's H1 2026 survey, investor demand for certain property types (neighborhood retail, industrial, hotel) was strong enough to compress cap rates even as the 10-year Treasury rose, offsetting softness elsewhere like lower-quality office.

How is cap rate different from ROI?

Cap rate measures a property's unleveraged return based on its own income and price. ROI (or cash-on-cash return) factors in your actual financing, so two buyers paying the same price for the same property can have very different ROI depending on their loan terms.

Can I use cap rate to value a property with no current tenant?

Not directly — cap rate needs an NOI figure to work from. For vacant or owner-user properties, comparable sales and replacement cost are usually the better valuation approach until there's leased income to underwrite.

Where do I find comparable cap rates for a specific Louisville submarket?

National surveys like CBRE's are a useful baseline, but local comparable sales data is what actually prices a specific deal — that's part of what we pull together when you're evaluating a property with us.