How to Calculate Cap Rate in Commercial Real Estate

If you’re interested in commercial real estate then there is a good chance you’ve already heard of the word “Cap Rate in Commercial Real Estate”. 

Cap rate, short for Capitalization Rate, calculates the estimated rate of return for your commercial investment. It’s a quick and popular method for investors to see the property’s potential as a percentage and to compare with the relative value of similar real estate investments. 

Calculation of Cap Rate in Commercial Real Estate

Net operating income / Purchasing Price = Your Cap Rate 

In our example let’s imagine that the Net Operating Income is $150,000 and that the Purchasing Price is $3,000,000.

$150,000 / $3,000,000 = 0.05 = 5%


Typically a larger cap rate means less appreciation. Commercial Properties in Vancouver have a lower cap rate because the properties there see higher appreciation. Their Cap Rate would tend to average at 3%-5%. Whereas further out into the interior it would be more common to see 6-8%.

However for those who are looking for a good Cap Rate for the areas in the Fraser Valley, generally a good cap rate would be between 4%-4.5%. 

Surrey being a particularly excellent choice for commercial investments as a good cap rate could be found in Surrey between 3.5%-4%. 


Of course there will and should be other factors to consider when choosing your commercial investment rather than a sole reliance on the Cap-Rate. The investor will also need to keep in mind that there might be other risks to account for beyond a good Cap-Rate, or that there might be other benefits to a property beyond a higher Cap-Rate. 

Start your commercial real estate investments by contacting Jas Oberoi Group

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