How to Calculate Cap Rate Step by Step (Utah Owner Guide)
Stockton Farnsworth, Utah Associate Broker · Team Utah Commercial, brokered by RE/MAX Associates
October 19, 2026 · 6 min read
If you own a commercial building in Utah, the cap rate is the number buyers, lenders and brokers reach for first. It is simple math, but small mistakes in the inputs can move your value by tens or hundreds of thousands of dollars. This guide walks through the calculation one step at a time, then covers the errors we see most often.
What a cap rate is
A capitalization rate is a building's yearly net operating income divided by its value or price. As Investopedia's cap rate guide puts it, the cap rate is most useful for comparing similar properties, not as a full measure of your return.
The formula has two forms, and both are worth knowing:
- Cap rate = NOI / value
- Value = NOI / cap rate
The first tells you what return a price implies. The second is how most commercial buildings are priced: take the income, divide by a cap rate the market supports for that kind of property, and you get an estimate of value.
Cap rates leave out financing on purpose. They describe the building, not the owner's loan, so two buyers with very different mortgages can compare the same property on equal terms.
Step 1: Start with gross potential rent
List every space and the rent it pays under its current lease. Use the rent actually in the lease, not what you hope to get. For vacant space, note it separately. You will deal with it in the next step.
Add any other steady income the property earns, such as storage yard fees, billboard or cell tower leases, or parking charges.
Step 2: Subtract vacancy and credit loss
No building stays 100% leased forever. Tenants move out, and some pay late or not at all. Buyers will always deduct something for this, even when your building is full today. If yours is full, you still want a realistic allowance. If it has vacancy now, the deduction should reflect what is actually empty.
What is left is your effective gross income: the money you can reasonably expect to collect.
Step 3: Subtract operating expenses
Operating expenses are the costs of running the building. Typical lines include:
- Property taxes
- Insurance
- Repairs and maintenance
- Property management (even if you manage it yourself)
- Common-area utilities
- Landscaping and snow removal
- Reserves for items that wear out, like roofs, parking lots and HVAC units
If tenants reimburse some of these under their leases, the reimbursements count as income, and the full expense still goes in this section. Our guide to NNN vs gross leases explains how that changes the picture.
Step 4: That leaves NOI
Effective gross income minus operating expenses equals net operating income (NOI). The Corporate Finance Institute's NOI guide notes that NOI ignores capital structure and taxes. That is exactly why it works for comparing buildings.
Step 5: Divide
Divide NOI by the price or value, and you have the cap rate. Or divide NOI by a cap rate, and you have a value. You can run both directions in our cap rate calculator.
Worked example
Example: These numbers are made up to show the math. They are not market data and do not describe any real building.
Picture a four-suite flex building somewhere along the Wasatch Front. Each suite rents for $3,000 a month under a signed lease.
| Line | Example amount |
|---|---|
| Gross potential rent (4 suites x $3,000 x 12) | $144,000 |
| Less vacancy and credit loss (example: 5%) | -$7,200 |
| Plus other income (example: yard storage fee) | $1,200 |
| Effective gross income | $138,000 |
| Property taxes | -$14,000 |
| Insurance | -$6,500 |
| Repairs and maintenance | -$7,000 |
| Property management | -$5,500 |
| Common utilities | -$2,400 |
| Landscaping and snow removal | -$3,600 |
| Reserves | -$3,000 |
| Total operating expenses | -$42,000 |
| Net operating income | $96,000 |
Now the two directions:
- If someone offers $1,400,000: $96,000 / $1,400,000 = 6.86% cap rate.
- If the right cap rate for this building were 7% (a made-up number for this example): $96,000 / 0.07 = about $1,371,000 in value.
Notice how sensitive the result is. In this example, at a 7% cap rate, every extra $1 of NOI adds about $14 of value. An NOI that is wrong by $10,000 means a value that is wrong by about $143,000.
The NOI mistakes that skew value
Most bad cap rate math comes from a bad NOI, not bad division. These are the mistakes that come up again and again.
Subtracting loan payments
Mortgage payments are not an operating expense. They depend on how the owner chose to finance, not on how the building performs. In the example above, if you subtracted $70,000 of yearly loan payments, NOI would drop to $26,000. The building would look like it earns a 1.9% cap rate, which describes your loan, not your property. If you want to measure the return after your loan, that is a different metric. See cap rate vs cash-on-cash vs IRR.
Depreciation and your income taxes stay out of NOI for the same reason: they belong to the owner, not the building.
Ignoring vacancy
A building that is full today still gets a vacancy deduction from any serious buyer. If you leave it out, your NOI is higher than anyone else will accept, and the value you calculate will not hold up. If you have a suite that has sat empty for a year, counting its rent as income is an even bigger version of the same mistake.
Using asking rents instead of actual rents
What you are asking for an empty suite, or what you believe the market would pay, is a projection. Buyers call it "pro forma." They will pay for the rents tenants are actually contracted to pay. Upside from below-market leases is real and worth pointing out, but list it separately so it is not mixed into today's NOI.
Leaving out management because you do it yourself
Your time has value, and a buyer will likely hire a manager or spend their own time. Include a market-level management fee even if you have never written yourself a check for it.
Skipping reserves
Roofs, parking lots and HVAC units wear out on a schedule whether or not you budget for them. Buyers deduct reserves, so you should too.
Counting one-time items
A one-time insurance payout, a lease termination fee or a big one-off repair can all distort a single year. Pull them out and look at the normal year underneath.
Missing personal or unrelated expenses
The opposite error happens too. Owners sometimes run personal vehicles, unrelated travel or another business's costs through the property's books. Those do not belong in operating expenses, and they make NOI look lower than it really is.
Where the cap rate itself comes from
Once your NOI is solid, the remaining question is which cap rate to divide by. That depends on the property type, location, building condition, tenant quality, lease length and current market conditions. It changes over time, and there is no single number that fits every building in Utah. A broker who tracks recent sales of comparable properties can tell you what range fits your building and why.
Get a real number on your building
The math above is general education, not legal, tax or investment advice. If you want to know what your building is likely worth today, call or text 801-664-3370 for a free broker opinion of value. It is not an appraisal. It is a licensed broker's view of likely price, based on your actual income, your leases and the current market.
Stockton Farnsworth, Utah Associate Broker, Team Utah Commercial, brokered by RE/MAX Associates.
General education only, not legal, tax, investment or appraisal advice. Information is believed reliable but not guaranteed. Written by Stockton Farnsworth, Utah Associate Broker, Team Utah Commercial, brokered by RE/MAX Associates.
