Glossary
Going-In Cap Rate
The going-in cap rate is the capitalization rate at acquisition, calculated as a property's first-year or trailing net operating income divided by the purchase price. It measures the initial unlevered yield a buyer receives and is the starting point for comparing a deal with market pricing and with the assumed exit cap rate.
Formula
Example
A buyer agrees to pay $15,000,000 for a shopping center. Trailing NOI is $870,000, but underwritten year 1 NOI, after resetting property taxes for reassessment and adding a replacement reserve, is $825,000. The seller's quoted cap rate is $870,000 / $15,000,000 = 5.8%, while the buyer's underwritten going-in cap rate is $825,000 / $15,000,000 = 5.5%. The gap is a pricing point to negotiate.
How it is used in underwriting
The going-in cap rate tells a buyer what yield the property provides on day one before financing. Underwriters compare it with cap rates on recent comparable sales, with the cost of debt and with the projected exit cap rate. If the going-in cap rate is below the mortgage constant, the deal has negative leverage, meaning debt reduces current cash yield, and returns depend on growth. Investors also compare the going-in rate with alternative investments and treasury yields to judge whether the risk premium is adequate for the property type and location.
The biggest source of confusion is which NOI is used. Brokers often quote cap rates on trailing NOI, pro forma NOI or NOI before reserves and tax reassessment, any of which can make the price look more attractive. Buyers should recalculate on their own underwritten year 1 NOI. Including closing costs and immediate capital needs in the denominator produces an all-in going-in rate that is more realistic. For value-add deals, the going-in rate is often low by design, and the investment case relies on a higher stabilized yield on cost once renovations and lease-up are complete.
Run the numbers: Cap Rate Calculator
Frequently asked questions
What is the difference between going-in and exit cap rate?
The going-in cap rate uses NOI and price at acquisition, while the exit cap rate is an assumption used to estimate the sale price at the end of the hold. Underwriters typically set the exit cap rate higher than the going-in rate to reflect aging of the asset and uncertainty about future markets.
Should the going-in cap rate use trailing or forward NOI?
Both are used. Trailing NOI shows actual results; forward or year 1 NOI reflects post-closing changes such as tax reassessment and new leases. Buyers usually underwrite a forward year 1 NOI with their own expense assumptions, then compare it with the trailing figure the seller quotes.
What is yield on cost?
Yield on cost divides projected stabilized NOI by total project cost, including the purchase price and renovation or development spending. Value-add and development investors compare it with market cap rates. If yield on cost exceeds the market cap rate by a healthy margin, the project creates value when stabilized.
Related terms
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