Going-in cap rate (NOI basis)
What is a cap rate from NOI calculator?
A cap rate from NOI calculator estimates the capitalization rate of an income-producing property by dividing annual net operating income by purchase price. It helps real estate investors, brokers, lenders, appraisers, and CRE analysts compare apartment buildings, retail centers, office properties, industrial assets, and rental portfolios on an unlevered income-yield basis before adding debt, taxes, or investor-specific financing assumptions.
Cap rate from NOI formula
The capitalization rate formula divides annual net operating income by the property's acquisition price, then converts the result to a percentage. It measures unlevered income yield before financing.
Cap rate = (Annual NOI / Purchase price) x 100- Price per $1 of NOI = Purchase price / Annual NOI.
- NOI should exclude mortgage payments, income taxes, depreciation, and investor-specific financing costs.
- Use trailing NOI, stabilized NOI, or forward NOI consistently and label the result clearly.
Inputs explained
Cap-rate analysis depends heavily on how NOI and purchase price are normalized before the ratio is calculated.
- Annual NOI ($)
- Net operating income for the property over a year. NOI usually equals effective rental income and other property income minus normal operating expenses, before debt service, depreciation, income taxes, and capital expenditures.
- Purchase price ($)
- The acquisition price or valuation basis used in the analysis. Some investors use contract price only, while others include closing costs, acquisition fees, immediate repairs, or capitalized basis depending on underwriting policy.
- Cap rate
- The unlevered yield implied by annual NOI divided by purchase price. Investors use it to compare property pricing, market risk, and income return across deals.
- Price per $1 NOI
- The inverse rough multiple of NOI. It shows how many dollars of purchase price are being paid for each dollar of annual net operating income.
Example cap rate calculation
If a property produces $52,800 in annual NOI and the purchase price is $685,000, the cap rate is about 7.71%. The inverse multiple is roughly 12.97x NOI, meaning the buyer pays about $12.97 for each $1 of annual NOI before considering debt, closing costs, capex, or future rent growth.
Going-in cap rate (NOI basis)
NOI ÷ acquisition price
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How to derive going-in cap rate from NOI
- Compile annualized NOI from rent rolls minus normalized operating expenses—exclude mortgage principal, interest, sponsor asset-management fees above NOI line, and below-the-line capex unless underwriting policy moves reserves upward.
- Enter contract purchase price consistent with PSA economics—add anticipated closing allocations when your IC defines basis that way.
- Divide to read “Cap rate” as NOI yield on untrended dollars—cross-check “Price per $1 NOI” multiple against broker OM comps.
- Layer debt quotes afterward—cap rate answers unlevered yield; cash-on-cash differs materially once leverage and amortization enter.
Common cap rate mistakes
- Using gross rent instead of net operating income.
- Including mortgage principal, interest, depreciation, or income taxes inside NOI.
- Comparing trailing cap rate to pro forma cap rate without labeling the difference.
- Ignoring one-time repairs, deferred maintenance, lease-up costs, or capital expenditures.
- Using contract price for one deal and total cost basis for another.
- Comparing cap rates across asset classes or markets without adjusting for risk, growth, and tenant quality.
- Assuming a higher cap rate is always better without checking property condition, rent durability, and exit risk.
Market-rate context for going-in cap yields
- Why brokers bundle market caps by asset class and geography
- Gateway multifamily quotes swing materially versus tertiary retail strips—triangulate sale comps before debating whether 7.7% is cheap or rich
- Difference between economic basis and contract price
- Transfer taxes, FF&E allocations, and TI packages allocated to basis shift denominator dollars—align definition with how your lender credits equity
- Stabilized NOI versus year-one value-add bleed
- Pro forma bumps inflate numerator timing—pair headline cap with sensitivity tables when lease-up risk spans quarters
Best use cases
- Growth and performance planning
- Budget and forecast scenario modeling
- Client-facing pre-qualification and education
FAQs
Should NOI include replacement reserves common area deductions?
Follow lender and appraisal conventions for your asset class—some buyers capitalize reserves below NOI while agency lenders quote above-line reserves—mixed treatment swings apparent yield.
Why might my appraisal cap differ from this headline?
Appraisers may normalize expenses, haircut rents, or pick trailing periods unlike your T-12 export—reconcile definitions before arguing valuation deltas.
Does purchase price include buyer acquisition fees?
Only if equity memo capitalizes diligence and commissions into invested basis—pure contract price keeps diligence additive unless modeled explicitly.
Can I use forward-year NOI for cap analysis?
Yes but label it pro forma yield-on-cost—going-in cap traditionally references stabilized trailing NOI unless IC approved forward underwriting.
How do I compare two properties with different cap rates?
Compare the cap rate with asset class, location, lease quality, tenant risk, rent growth, deferred maintenance, and financing assumptions. A higher cap rate can mean better income yield, but it can also signal higher risk, weaker tenants, lower growth, or capital needs.
Should property taxes be included in NOI for cap rate?
Yes, normal property taxes are usually an operating expense and should be included in NOI. However, reassessment after sale can change the tax burden, so buyers often underwrite a pro forma tax expense rather than relying only on the seller's trailing tax bill.
How do vacancy and credit loss affect NOI and cap rate?
Vacancy and credit loss reduce effective income and therefore reduce NOI. If the seller uses fully occupied rent but your underwriting assumes vacancy, your cap rate will be lower than the offering memo suggests.
Why can a property have a good cap rate but poor cash-on-cash return?
Cap rate is unlevered and ignores financing. Cash-on-cash return depends on debt terms, interest rate, amortization, closing costs, reserves, and equity invested. Rising interest rates can make an attractive cap rate produce weak leveraged returns.
How should major repairs or capex be handled in cap-rate analysis?
Do not hide major capital needs inside stabilized NOI unless your underwriting policy explicitly includes reserves. Many investors calculate going-in cap rate from NOI, then separately model roof, HVAC, tenant improvements, deferred maintenance, and renovation costs in total basis or cash-flow projections.
How do I use market cap rates to estimate property value from NOI?
Rearrange the formula: estimated value = NOI / market cap rate. For example, $100,000 of NOI at a 6% market cap implies about $1.67 million of value. The market cap rate should come from comparable sales with similar asset type, location, lease quality, and risk.
Glossary
Scenario modeling
Comparing multiple assumption sets to estimate potential outcomes before execution.
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User behavior that indicates readiness to take a commercial action such as signup or purchase.
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Category: Income-property underwriting & CRE valuationTopics: Going-in cap rate, NOI yield, Acquisition underwriting
Last reviewed: 2026-05-07
Reviewed by: Calclet Growth Team