Commercial Real Estate ROI Calculator
Analyze commercial property investments with cap rate, cash-on-cash return, NOI, DSCR, and IRR projections. Pro forma analysis for multifamily, office, retail, and industrial properties.
Property Details
Annual Income
Annual Operating Expenses
Loan Details
Net Operating Income (NOI)
$75,875
NOI Breakdown
Cap Rate Guidelines
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About This Calculator
The Commercial Real Estate ROI Calculator provides institutional-grade analysis for evaluating investment properties using professional metrics: cap rate, cash-on-cash return, net operating income (NOI), debt service coverage ratio (DSCR), and internal rate of return (IRR). With commercial real estate transaction volume up 40% year-over-year in Q3 2025 and Colliers forecasting a 15-20% increase in sales volume for 2026, accurate deal analysis is essential for capitalizing on the market recovery. Multifamily cap rates have compressed to 4.74% for Class A properties (Marcus & Millichap), while industrial and retail sectors show stabilization. Whether you're analyzing multifamily apartments, office buildings, retail centers, industrial warehouses, or self-storage facilities, this calculator delivers the key performance indicators that sophisticated investors, lenders, and syndicators use to underwrite commercial deals.
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How to Use the Commercial Real Estate ROI Calculator
- 1Enter the purchase price, down payment percentage (typically 25-35% for commercial), and closing costs (usually 2-4% of purchase price).
- 2Input gross potential rent from all units/spaces, plus other income (parking, laundry, storage, CAM reimbursements).
- 3Set your vacancy and collection loss assumption—5-10% is standard, but verify market-specific rates.
- 4Add operating expenses: property taxes, insurance, management (4-10%), maintenance, utilities, reserves, and any other recurring costs.
- 5Enter loan terms: interest rate (2025-2026 commercial rates average 6.5-8%), amortization (typically 25-30 years), and loan term.
- 6For advanced analysis, enable Pro Forma mode to project rent growth, expense inflation, appreciation, and exit value.
- 7Review key metrics: Cap Rate, Cash-on-Cash Return, DSCR, NOI, annual cash flow, and IRR projections.
2025-2026 Commercial Real Estate Cap Rates by Sector
Cap rates have stabilized after 2023-2024's expansion. Here's the current landscape (CBRE H1 2025 Cap Rate Survey):
Multifamily Cap Rates (Q1 2025):
| Class | Cap Rate | Change from 2024 |
|---|---|---|
| Class A | 4.74% | Flat |
| Class B | 4.92% | -7 bps |
| Class C | 5.38% | -4 bps |
Industrial Cap Rates:
| Asset Type | Current | CBRE Long-Term Forecast |
|---|---|---|
| Bulk Distribution | 4.5-5.5% | 4.5% (stabilized) |
| Last-Mile Logistics | 4.0-5.0% | Below 4.5% |
| Flex Industrial | 5.5-6.5% | 5.0% |
Retail Cap Rates:
| Format | Current Range | Average |
|---|---|---|
| Grocery-Anchored | 5.5-6.5% | 6.0% |
| Strip Centers | 6.0-7.5% | 6.7% |
| Single-Tenant NNN | 5.0-6.5% | 5.8% |
| Power Centers | 6.5-8.0% | 7.2% |
Office Cap Rates (Most Volatile):
| Class | Current | vs. 2019 Peak |
|---|---|---|
| Class A CBD | 5.5-7.0% | +150-200 bps |
| Class A Suburban | 6.0-7.5% | +100-150 bps |
| Class B | 7.0-9.0% | +200-300 bps |
| Class C | 8.0-12.0% | Distressed pricing |
2026 Forecast: CoStar predicts cap rate compression in multifamily and industrial as vacancies peak and rent growth returns.
Essential Commercial Real Estate Formulas
Master these formulas to analyze any commercial property:
1. Net Operating Income (NOI):
NOI = Effective Gross Income - Operating Expenses
Where:
Effective Gross Income = Gross Potential Rent + Other Income - Vacancy Loss
Example:
| Line Item | Amount |
|---|---|
| Gross Potential Rent | $500,000 |
| Other Income | $25,000 |
| Less: Vacancy (7%) | -$36,750 |
| Effective Gross Income | $488,250 |
| Operating Expenses | -$195,300 |
| NOI | $292,950 |
2. Capitalization Rate (Cap Rate):
Cap Rate = NOI / Purchase Price × 100
$292,950 / $4,500,000 = 6.51% Cap Rate
3. Cash-on-Cash Return (CoC):
CoC = Annual Pre-Tax Cash Flow / Total Cash Invested × 100
4. Debt Service Coverage Ratio (DSCR):
DSCR = NOI / Annual Debt Service
Lenders require 1.20-1.35 minimum. Higher is better.
5. Gross Rent Multiplier (GRM):
GRM = Purchase Price / Gross Annual Rent
Quick screening tool: lower GRM = potentially better value.
6. Internal Rate of Return (IRR): The discount rate that makes NPV of all cash flows equal zero. Accounts for time value of money across the entire holding period.
Operating Expense Ratios by Property Type
Operating expenses vary significantly by property type. Use these benchmarks to verify seller-provided numbers:
Expense Ratios (Operating Expenses / EGI):
| Property Type | Low | Typical | High |
|---|---|---|---|
| Multifamily (100+ units) | 35% | 40-45% | 50% |
| Multifamily (small) | 40% | 45-50% | 55% |
| Office (Full-Service) | 40% | 45-50% | 55% |
| Office (NNN) | 5% | 10-15% | 20% |
| Retail (NNN) | 5% | 10-15% | 20% |
| Retail (Gross) | 25% | 30-35% | 40% |
| Industrial | 15% | 20-25% | 30% |
| Self-Storage | 30% | 35-40% | 45% |
Major Expense Categories:
| Expense | % of EGI | Notes |
|---|---|---|
| Property Taxes | 10-20% | Varies dramatically by location |
| Insurance | 3-8% | Rising rapidly since 2020 |
| Management | 4-10% | Lower % for larger properties |
| Repairs/Maintenance | 5-10% | Older properties = higher |
| Utilities | 0-15% | Depends on tenant pass-through |
| Reserves | 2-5% | CapEx, tenant improvements |
Red Flags in Seller Pro Formas:
- Expense ratio significantly below market norms
- Missing or understated property taxes
- No management fee (even if self-managed)
- Below-market insurance costs
- Zero reserves for capital expenditures
Value-Add vs. Stabilized Investment Strategies
Commercial real estate investments fall into distinct strategy categories:
Core (Stabilized):
| Characteristic | Details |
|---|---|
| Property Quality | Class A, institutional grade |
| Occupancy | 90%+ stabilized |
| Cap Rate Range | 4-5.5% |
| Target IRR | 6-9% |
| Risk Level | Low |
| Hold Period | 7-10+ years |
| Debt | 50-60% LTV |
Core-Plus:
| Characteristic | Details |
|---|---|
| Property Quality | Class A/B with minor upside |
| Occupancy | 85%+ with some lease-up |
| Cap Rate Range | 5-6.5% |
| Target IRR | 9-12% |
| Risk Level | Low-Medium |
| Hold Period | 5-7 years |
| Debt | 55-65% LTV |
Value-Add:
| Characteristic | Details |
|---|---|
| Property Quality | Class B/C requiring renovation |
| Occupancy | 70-85%, vacancy to fill |
| Cap Rate Range | 6-8% going-in |
| Target IRR | 12-18% |
| Risk Level | Medium-High |
| Hold Period | 3-5 years |
| Debt | 60-75% LTV (value-add loans) |
Opportunistic:
| Characteristic | Details |
|---|---|
| Property Quality | Distressed, turnaround situations |
| Occupancy | Often <70% or vacant |
| Cap Rate Range | 8%+ or development plays |
| Target IRR | 18-25%+ |
| Risk Level | High |
| Hold Period | 2-5 years |
| Debt | Complex capital stacks |
2026 Strategy Outlook: Value-add multifamily and opportunistic office offer highest return potential but require experienced operators.
Commercial Loan Terms and DSCR Requirements
Understanding financing is crucial—leverage amplifies both returns and risks:
Current Commercial Loan Rates (Late 2025):
| Loan Type | Rate Range | Typical LTV |
|---|---|---|
| Bank (Recourse) | 6.5-7.5% | 65-75% |
| CMBS | 6.0-7.0% | 60-70% |
| Life Insurance | 5.5-6.5% | 55-65% |
| Agency (Fannie/Freddie) | 5.5-6.5% | 75-80% |
| Bridge/Hard Money | 9-12% | 70-80% |
| DSCR (Investor) | 7-9% | 70-80% |
DSCR Requirements by Lender Type:
| Lender | Min DSCR | Notes |
|---|---|---|
| Banks | 1.20-1.30 | Global cash flow considered |
| CMBS | 1.25-1.35 | Property-level only |
| Agency | 1.20-1.25 | Most flexible |
| Life Insurance | 1.30-1.40 | Most conservative |
| Bridge | 1.00-1.10 | Value-add loans |
Loan Sizing Example:
| Property | Value |
|---|---|
| NOI | $300,000 |
| Target DSCR | 1.25 |
| Max Debt Service | $240,000/year |
| Rate/Amort | 7% / 25 years |
| Max Loan | ~$2,850,000 |
| LTV (on $4.5M property) | 63% |
Key Loan Terms to Understand:
- Recourse vs. Non-Recourse: Personal guarantee required?
- Prepayment Penalty: Yield maintenance, defeasance, step-down
- Interest-Only Period: 1-3 years common on value-add
- Floating vs. Fixed: Floating adds interest rate risk
- Extension Options: Critical for value-add execution
Pro Forma Projections and Exit Analysis
Sophisticated investors model the entire hold period, not just Year 1:
Pro Forma Assumptions (Conservative):
| Assumption | Conservative | Moderate | Aggressive |
|---|---|---|---|
| Rent Growth | 2% | 3% | 4%+ |
| Expense Growth | 3% | 2.5% | 2% |
| Exit Cap Rate | +50 bps | +25 bps | Flat |
| Vacancy | Market + 2% | Market | Market - 2% |
| Hold Period | 5 years | 5 years | 3 years |
5-Year Pro Forma Example ($4.5M Multifamily):
| Year | NOI | Debt Service | Cash Flow |
|---|---|---|---|
| 1 | $293,000 | $230,000 | $63,000 |
| 2 | $302,000 | $230,000 | $72,000 |
| 3 | $311,000 | $230,000 | $81,000 |
| 4 | $320,000 | $230,000 | $90,000 |
| 5 | $330,000 | $230,000 | $100,000 |
Exit Value Calculation:
| Metric | Conservative | Base Case |
|---|---|---|
| Year 5 NOI | $330,000 | $330,000 |
| Exit Cap Rate | 7.0% | 6.5% |
| Gross Sale Price | $4,714,286 | $5,076,923 |
| Less: Costs (2%) | -$94,286 | -$101,538 |
| Net Proceeds | $4,620,000 | $4,975,385 |
| Less: Loan Payoff | -$2,650,000 | -$2,650,000 |
| Equity Proceeds | $1,970,000 | $2,325,385 |
IRR Calculation: Initial equity: $1,575,000 (35% of $4.5M) Annual cash flows: $63K-$100K Exit equity: $1.97M-$2.33M Estimated IRR: 10-14% depending on exit cap rate
Due Diligence Checklist for Commercial Acquisitions
Professional investors follow rigorous due diligence processes:
Financial Due Diligence:
| Document | What to Verify |
|---|---|
| Rent Roll | Tenant names, lease terms, rates vs. market |
| T-12 Operating Statement | Actual income/expenses last 12 months |
| T-3 (Trailing 3 Years) | Revenue/expense trends |
| Lease Abstracts | Terms, options, escalations, CAM |
| Accounts Receivable | Tenant payment history, delinquencies |
| Tax Bills | Actual taxes vs. pro forma |
| Insurance Policies | Coverage adequacy, premium trends |
Physical Due Diligence:
| Inspection | Focus Areas |
|---|---|
| Property Condition Report | Roof, HVAC, structure, code compliance |
| Environmental (Phase I) | Contamination history, risk assessment |
| Survey | Boundaries, easements, encroachments |
| Zoning Verification | Permitted uses, parking requirements |
| Utility Review | Capacity, condition, separate metering |
Legal Due Diligence:
| Review | Key Issues |
|---|---|
| Title Report | Liens, encumbrances, easements |
| Lease Review | Tenant rights, assignment provisions |
| Service Contracts | Transferability, termination rights |
| Litigation Search | Pending lawsuits, code violations |
| Entity Documents | Seller authority to convey |
Timeline: Standard due diligence period is 30-60 days for commercial transactions. Don't rush—surprises after closing are expensive.
Pro Tips
- 💡Always verify seller-provided NOI by requesting actual rent rolls, T-12 operating statements, tax bills, and utility invoices—never underwrite based on pro forma alone.
- 💡Use conservative vacancy assumptions (5-10% even in strong markets) and stress-test deals at 15-20% vacancy to understand downside risk.
- 💡Compare the property's expense ratio to market benchmarks—below-market ratios often indicate understated expenses or deferred maintenance.
- 💡Model exit cap rates 25-50 basis points higher than entry (cap rate expansion assumption) for conservative IRR projections.
- 💡Calculate DSCR before and after rate adjustments if financing includes floating rates or refinancing requirements during your hold period.
- 💡Walk the property yourself during due diligence—physical condition issues often don't appear in seller documents.
- 💡Factor in capital reserves (2-5% of value annually) for roof replacements, HVAC systems, tenant improvements, and leasing commissions.
- 💡Get a Phase I Environmental Assessment on any industrial, gas station, dry cleaner, or property with potential contamination history.
- 💡Review all leases carefully—below-market leases are opportunities, but tenant options to renew at fixed rates can limit upside.
- 💡Build relationships with commercial mortgage brokers—they provide market intelligence and access to competitive loan programs.
- 💡Analyze rent roll rollover risk - multiple large leases expiring simultaneously creates refinancing and valuation uncertainty.
- 💡Track your property against benchmarks like NCREIF to evaluate performance relative to the broader market.
- 💡Consider cost segregation studies for accelerated depreciation benefits on commercial property purchases.
Frequently Asked Questions
A "good" cap rate depends on property type, location, and risk profile. In 2026, Class A multifamily trades at 4.74-5.5% cap rates, industrial at 4.5-5.5%, grocery-anchored retail at 5.5-6.5%, and office varies widely from 5.5% (Class A CBD) to 10%+ (Class C). Higher cap rates indicate higher risk but potentially better returns. In today's elevated interest rate environment, investors should target cap rates at least 150-200 basis points above their borrowing cost to maintain positive leverage.
