How to Calculate Cap Rate and NOI on Commercial Property
The offering memo is in your inbox. “Retail center, Fort Worth, 7.5% cap rate.” Your pulse goes up a little.
Then you ask: Which NOI is it? The actual numbers from last year, or the broker’s fantasy version with every suite leased at top rent?
Net operating income (NOI) is the property’s annual income minus its operating expenses (before loan-service payments). The cap rate is that NOI divided by the price. If you get those two figures right, you know what the property is worth to you.
To calculate NOI, start with gross rent, deduct vacancy, add any expense reimbursements, and then subtract operating expenses. Loan payments and capital improvements are not included. The cap rate is simply NOI divided by the purchase price. In DFW in 2026, strip retail is trading at about 6.4% and office at about 7.9%.
What Is NOI in Commercial Real Estate?
NOI is the cash the property produces from operations in a year. It ignores financing, so two buyers with very different loans can have the same NOI.
The formula is short:
NOI = Effective Gross Income − Operating Expenses
The hard part is not the math. It’s deciding what belongs on each side of that minus sign.
| Counts in NOI | Doesn’t Count in NOI |
|---|---|
| Base rent actually collected | Mortgage principal and interest |
| Tenant reimbursements for taxes, insurance, and CAM | Roof replacement, new HVAC, parking lot rebuild |
| Parking, signage, or other property income | Depreciation |
| Property taxes and insurance | Your personal income taxes |
| Repairs, landscaping, utilities, management fees | Tenant improvement allowances and leasing commissions* |
*Tenant improvements and commissions are below NOI in most underwriting. They still drain real cash, particularly on office buildings. More on that later.
How to Calculate NOI Step by Step
Start with the rent roll and the trailing 12-month operating statement (the T-12). Then build the NOI in five steps.
- Add up gross potential rent. That’s every suite’s base rent, assuming 100% occupancy.
- Subtract vacancy and credit loss. Use real vacancy, not zero.
- Add tenant reimbursements for taxes, insurance, and CAM.
- Add other income, like parking or a cell tower lease. The result is effective gross income.
- Subtract all operating expenses. What’s left is NOI.
Let’s run it on an example: a 12,000 sq ft strip center in the DFW suburbs. It averages $22 per sq ft on NNN leases and is 95% leased.
| Line Item | How It’s Calculated | Amount |
|---|---|---|
| Gross potential rent | 12,000 sq ft × $22 | $264,000 |
| Less vacancy and credit loss | 5% of base rent | −$13,200 |
| Plus NNN reimbursements | 95% of $108,000 in expenses | +$102,600 |
| Effective gross income | $353,400 | |
| Taxes, insurance, and CAM | $9 per sq ft | −$108,000 |
| Management fee | 4% of effective gross income | −$14,136 |
| Net operating income | $231,264 |
Notice the vacant 5%. Nobody reimburses expenses on empty space, so the owner eats that slice. Sellers love to forget this line.
Also notice the management fee. Some owners self-manage and leave it out. A buyer will pay someone, so we always include it.
How to Calculate Cap Rate and Property Value
Cap rate is NOI divided by price. Flip that formula, and you get price = NOI ÷ cap rate.
Cap Rate = NOI ÷ Purchase Price
Value = NOI ÷ Cap Rate
If the seller is asking $3.6 million for our strip center, then $231,264 divided by $3,600,000 is a 6.4% cap rate.
Now watch what small cap rate changes do to value. Same NOI but different market cap rates:
| Cap Rate | Value of $231,264 NOI | Change vs 6.4% |
|---|---|---|
| 6.0% | $3,854,400 | +$240,900 |
| 6.4% | $3,613,500 | Baseline |
| 7.0% | $3,303,771 | −$309,729 |
| 7.5% | $3,083,520 | −$529,980 |
Half a point moves the value by roughly $300,000. That is why brokers and buyers argue about cap rates like it is the final slice of brisket.
NOI errors hurt just as much. Overstate NOI by $10,000 at a 6.4% cap rate and you overpay by about $156,000.
“Price is what you pay. Value is what you get.”
Warren Buffett, chairman of Berkshire Hathaway, 2008 shareholder letter
What Is a Good Cap Rate for Retail and Office in DFW in 2026?
A good cap rate corresponds to the property’s risk. In DFW in 2026, retail trades in the mid-6% range and office trades closer to 8%.
| DFW Property Type | Average Cap Rate, Q2 2026 |
|---|---|
| Small strip centers | 6.4% |
| Single-tenant net lease retail | 6.8% |
| Malls | 6.9% |
| Retail average | 6.7% |
| Office average | 7.9% |
These DFW figures come from Apartment Loan Store’s Dallas-Fort Worth cap rate tracker, which cites CBRE data. Treat them as market averages, not a price tag for your building.
Nationally, cap rates barely moved. CBRE’s H1 2026 Cap Rate Survey put the all-property average near 6.6%. That held even as the 10-year Treasury yield peaked at 4.67%.
Why does office carry a higher cap rate? Risk. CBRE reported DFW office vacancy at 24.6% in Q3 2026. Retail is the opposite story. The Weitzman Group measured DFW retail occupancy at 95.3% at midyear 2026.
So is a higher cap rate better? For your yield, yes. But a high cap rate often means the market sees trouble you have not found yet.
Retail vs Office NOI: What Changes Between Property Types
Retail NOI is usually steadier because tenants reimburse most expenses. Office NOI swings more because owners carry more costs and tenant turnover costs are high.
| Factor | Retail Strip Center | Multi-Tenant Office |
|---|---|---|
| Typical lease type | NNN | Full service or base year |
| Expense recovery | Most expenses reimbursed | Only increases over the base year |
| Owner-paid utilities and janitorial | Rare | Common |
| Cost to re-lease a suite | Moderate | High: tenant improvements plus commissions |
| DFW vacancy, 2026 | About 5% | About 25% |
That “cost to re-lease” row is the sneaky one. A new office tenant often needs a big improvement allowance and a broker commission. Those costs sit below NOI, so the cap rate never shows them.
On an office deal, we would look past NOI to cash flow after reserves. Otherwise, a 7.9% cap rate can feel like 5% in real life.
Common NOI Mistakes That Make a Property Look Better Than It Is
Most inflated NOI comes from optimistic income or missing expenses. In Texas, two expense lines you need to watch closely are property taxes and insurance.
Start with taxes. Appraisal districts will often increase a property’s value after it’s sold. Underwrite taxes on your purchase price, not on the seller’s current bill.
Then insurance. Texas was the nation’s hail damage capital for the 11th straight year, according to United Policyholders. Get a real insurance quote during due diligence. Don’t copy last year’s premium.
Watch for these too:
- Pro forma rent instead of rent tenants actually pay
- Zero vacancy on a building that has never been fully leased
- No management fee because the seller manages it personally
- Free rent periods left out of the income line
- Deferred repairs that show up as “low expenses”
Our rule is straightforward. If the seller’s NOI is greater than the bank deposits, the bank deposits win.
Cap Rate vs Cash-on-Cash Return vs DSCR
Cap rate is a property measure. Cash-on-cash is a measure of your equity. DSCR is a measure of whether the income is sufficient to service the loan.
| Metric | Formula | What It Tells You | Who Cares Most |
|---|---|---|---|
| Cap rate | NOI ÷ price | Unleveraged yield on the property | Buyers, appraisers, brokers |
| Cash-on-cash return | Annual cash flow after debt ÷ cash invested | Return on your own money | You, the investor |
| DSCR | NOI ÷ annual debt payments | How safely income covers the loan | Lenders |
All three start with NOI. Get NOI wrong, and every number after that is wrong as well.
Planning to finance? Many commercial lenders will be looking for a DSCR of about 1.20x to 1.25x or higher. For more on business-purpose loan options, see our Capital Solutions page.
How Out-of-State Investors Can Verify NOI on a DFW Property
Verify the NOI by checking the rent roll, the leases, the bank deposits and the actual condition of the building. Some of that you can do from a spreadsheet, some of it you’ll need to do on the ground.
Texas Property Knights helps out-of-state investors see what the numbers can’t show. Our TPKAsset team will arrange site visits, inspections and local data reviews throughout Dallas, Tarrant, Collin and Denton counties. A photo of an empty storefront tells you far more than any pro forma ever will.
See our DFW asset services or learn how to invest in DFW from out of state.
Key Takeaways
- NOI is income minus operating expenses, before loan payments and capital costs.
- Cap rate equals NOI divided by price. Value equals NOI divided by cap rate.
- In DFW in Q2 2026, strip retail averaged a 6.4% cap rate and office averaged 7.9%.
- Half a point of cap rate can move a $3.6 million property’s value by about $300,000.
- In Texas, underwrite taxes on your purchase price and get a fresh insurance quote.
Frequently Asked Questions
How do you calculate NOI on a commercial property?
Take gross rent, deduct vacancy, and add in tenant reimbursements and any other income. Then subtract your operating expenses (taxes, insurance, repairs, management, etc.). Don’t include loan payments or capital improvements.
What is a good cap rate for commercial real estate in Texas?
In DFW in 2026, retail is averaging 6.4% to 6.9%, and office is averaging around 7.9%. A good cap rate reflects the property’s risk. The higher the cap rate, the more vacancy or tenant risk there is.
Is a higher cap rate better for investors?
A higher cap rate means more income per dollar invested. It generally also means more risk (poor tenants, high vacancy, etc.). You can only compare cap rates on like properties in like locations.
Does NOI include mortgage payments?
No, NOI doesn’t include mortgage payments. It’s the property’s income before any financing. Lenders look at NOI and debt service separately using DSCR.
How do property taxes affect cap rate in Texas?
Higher taxes lower NOI, which lowers the cap rate at a given price. Texas appraisal districts often raise values after a sale. Underwrite taxes on your purchase price to avoid overpaying.
Looking at a DFW retail or office property and not sure the NOI holds up? Talk to Texas Property Knights. We’ll help you check the numbers against what’s actually on the ground.
This guide is general information, not investment, tax, or legal advice.