Going-in Cap Rate

Going-in-cap rate is the cap rate based on the ratio of the first year of net operating income to the property purchase price. 

For example, if a property is expected to generate a first year net operating income (NOI) of $100,000 and is valued at $1,250,000, it would have a cap rate of 8.0% ($100,000 / $1,250,000).

For acquisitions, some firms annualize the 12-month NOI by taking one month and multiplying it by 12 or taking the forward three months and multiplying them by 4. Also, the purchase price does not include any closing costs.

Development projects use a slightly different calculation. Total project costs are used in this case. These costs include land, legal, closing, financing fees, other fees, and construction debt interest. Developments may refer to the going-in cap rate as the (forward) stabilized cap rate. The calculation is also different from that of the acquisition calculation:

[forward stabilized cap rate] / [total project cost]

Because development projects are new construction and start with no tenants, the stabilized cap rate doesn’t come into play until all property units are leased, and cash flow is being generated. This differs from an acquisition, which has cash flow from the time that the property is acquired.

Another Way To Own Investment Properties

Download our guide to real estate investing Seek an Upgraded Real Estate Portfolio
Download eBook

 


Download our guide to real estate investing

Another Way To Own Investment Properties

Learn new ways to use real estate to pursue your wealth goals.

By providing your email and phone number, you are opting to receive communications from Realized. If you receive a text message and choose to stop receiving further messages, reply STOP to immediately unsubscribe. Msg & Data rates may apply. To manage receiving emails from Realized visit the Manage Preferences link in any email received.