Cap Rates vs. IRR in Commercial Real Estate Investments
                     Cap Rates vs. IRR in Commercial Real 
Estate Investments
https://achieve-academy.net/cap-rates-vs-irr-in-commercial-real-estate-investments/
INDEX
• What is Cap Rate?
• How to Calculate Cap Rates
• What is IRR?
• How is IRR Calculated?
• When to Use Cap Rates vs. IRR
• Final Thought
What is Cap Rate?
A capitalization rate, or cap rate, is an annualized measure of the net 
operating income (NOI) divided by the property’s investment value. In 
other words, a cap rate tells you how much cash flow you can expect 
from a property over a given period of time. It’s calculated by dividing 
the NOI by the purchase price
How to Calculate Cap Rates
Calculating a cap rate involves dividing the net operating income (NOI) 
by the purchase price, like so:
Cap Rate = NOI / Purchase Price
Net Operating Income = NOI
Purchase Price = P
Cap Rate = NOI / P
What is IRR?
The Internal Rate of Return (IRR) is a measure of the profitability of an 
investment. It tells you what rate of return you would earn if you held 
onto that investment for one year with no reinvestment risk. It’s 
calculated by solving for the discount rate that makes your total 
expected cash flows equal to zero.
How is IRR Calculated?
The internal rate of return (IRR) is a metric used to evaluate the 
profitability of an investment. It is calculated by discounting the future 
cash flows of a project back to the present day at an assumed cost of 
capital. The IRR can then be used to compare different investments and 
determine which one offers the highest return.
The IRR can be calculated using the following equation:
IRR = Net Present Value / Cost of Capital
When to Use Cap Rates vs. IRR
Cap rates and internal rates of return (IRR) are two common ways to 
measure the value of a real estate investment property. Both can be 
used to compare investments and choose the most profitable ones, but 
they measure different aspects of the deal.
Cap rates and IRR are both useful metrics to investors. The cap rate is a 
measure of the return on investment (ROI) that you make when buying 
an asset. The IRR is the rate at which your investment will return the 
initial capital invested.
Final Thought
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