Capitalization Rate article
How is the Capitalization Rate calculated for commercial real estate investments and developments? What are the factors that the Capitalization Rate takes into consideration when shown in a proforma income statement, and what is ignored? Why is the Capitalization Rate useful for investment real estate? These are the questions that are explored using the Proforma Example in this article.
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Video Title: Learn about the Capitalization Rate
Video Publication_Date: Wednesday, October 15, 2025
Video Duration: 8:09
Video Description:
The topic for this commercial real estate investment analysis video is Capitalization Rate. Throughout the video planEASe Software is used to illustrate Capitalization Rate. The video does not use the current Proforma Example, but all the factors that the Capitalization Rate are sensitive to are covered.
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Initial Investment = $3,300,000.00 | 2010 | 2011 | 2012 | 2013 | 2014 | 2015 |
| Total Gross Income | $365,472 | $372,443 | $370,410 | $376,040 | $384,217 | $414,321 |
| Less: Vacancy & Credit Loss | 19,084 | 3,202 | 14,620 | 5,049 | 3,501 | 50,321 |
| Effective Income | $346,387 | $369,241 | $355,790 | $370,992 | $380,717 | $364,000 |
| Total Operating Expenses | $69,400 | $71,244 | $73,141 | $75,094 | $77,103 | $79,170 |
| Net Operating Income | $276,987 | $297,997 | $282,649 | $295,898 | $303,614 | $284,830 |
| Capitalization Rate | 8.39% | 9.03% | 8.57% | 8.97% | 9.20% | 8.63% |
In this case the 2010 Capitalization Rate was calculated by: | 2010 Net Operating Income (NOI) | $276,987 |
| divide by the Price | $3,300,000.00 |
| equals the 2010 Cap Rate | 8.39% |
Considers:- Expenses and Gross Income (Potential)
Ignores:-
Vacancy, Time Value of Money, Sale Proceeds, All Financing (Loans), Other Years NOI, All Taxes
... and a lot of other things
Why is Operating Expense Ratio useful?
Operating Expense Ratio is the Total Operating Expenses divided by the Gross Income, which tests the reality of the total expense amount, as well as the expense growth rate. Note that this ratio is better presented in the Common Size report which shows the same ratio for each of the individual expenses as well as the total.
What is the Operating Expense Ratio Sensitive to:
Anything related to Expenses and Gross Income (Potential) in the current year
The Operating Expense Ratio is shown in these planEASe Reports:
Written by
Michael Feakins, CCIM
of planEASe Software