Going-in cap rate is the first-year net operating income of a property divided by its purchase price or total project cost, expressed as a percentage. It measures the entry yield a buyer earns at acquisition, before any income growth. Underwriters use it to judge whether the closing price is fair for the income in place.
How Is Going-In Cap Rate Calculated?
Going-in cap rate is calculated by dividing year-one or stabilized net operating income by the total acquisition cost. The formula is Going-In Cap Rate = Year-One NOI / Purchase Price. Per Wall Street Prep, a residential development with $2.8 million stabilized NOI and $28.1 million total project cost has a going-in cap rate of 10.0%.
The NOI used is forward-looking, not trailing. Most underwriters use the projected first-year NOI after close, which is why the going-in cap rate is sometimes called the entry or acquisition cap rate. When a property is not yet stabilized, some analysts substitute stabilized NOI to produce a cleaner entry yield, but the two conventions are not interchangeable.
Input | Source | Convention |
Year-one NOI | Buyer's pro forma for the first 12 months after close | Most common |
Stabilized NOI | Projected NOI once the asset reaches market occupancy | Used for value-add or development |
Purchase price | Contract price plus closing costs, or total project cost | Denominator |
Because the going-in cap rate anchors on the price paid, it is the cleanest single check on whether a buyer overpaid. A low going-in cap rate on in-place income signals the buyer is paying up for future growth, not current yield.
Why Going-In Cap Rate Matters
Going-in cap rate matters because it converts the purchase price into a yield the buyer can compare against financing costs, alternative deals, and the assumed exit. When the going-in cap rate sits below the loan constant, the deal carries negative leverage at entry, a condition where debt drags down cash returns rather than lifting them until income grows.
The spread between the going-in cap rate and the exit cap rate drives much of a deal's projected return. Underwriters typically set the exit cap 25 to 75 basis points above the going-in cap to account for property aging and forecast uncertainty, per Financial Edge and Wall Street Oasis, and historically PwC investor surveys have shown exit rates averaging roughly 50 basis points above going-in on long holds. A going-in cap that is too optimistic understates the price and inflates every downstream return.
Example
An investor acquires a stabilized industrial building for $25,000,000 with projected first-year NOI of $1,375,000. Dividing NOI by price gives the going-in cap rate. The table shows the entry yield and how it shifts if the buyer negotiates the price down.
Purchase price | Year-one NOI | Going-in cap rate |
$25,000,000 | $1,375,000 | 5.50% |
$24,000,000 | $1,375,000 | 5.73% |
$22,916,667 | $1,375,000 | 6.00% |
At $25,000,000 the buyer earns a 5.50% entry yield. Negotiating the price to $22,916,667 lifts the going-in cap rate to 6.00% on the same income, raising the entry yield by 50 basis points. Each dollar shaved off the price raises the going-in cap rate, which is why the metric is the first screen in most acquisition underwriting.
Variations and Edge Cases
Going-in cap rate is not a single convention: the result depends on which NOI and which cost basis the analyst uses. In-place versus stabilized NOI, purchase price versus total project cost, and trailing versus forward income all change the number. The table separates the common variants.
Variant | Denominator | NOI used |
Entry cap on in-place NOI | Purchase price | Trailing or year-one income as-is |
Stabilized going-in cap | Purchase price | NOI after lease-up |
Development yield on cost | Total project cost | Stabilized NOI at completion |
The frequent error is comparing a going-in cap on stabilized NOI against another deal's going-in cap on in-place NOI. On a value-add asset the two can differ by more than a full point. A going-in cap rate is only meaningful paired with the exact NOI and cost basis that produced it.
Going-In Cap Rate vs Exit Cap Rate
Going-in cap rate is often confused with exit cap rate, but they describe opposite ends of the hold. Going-in cap rate is year-one NOI divided by the purchase price, the yield at acquisition. Exit cap rate is the cap rate assumed at sale, applied to future NOI to estimate the resale price. One prices the buy, the other prices the sell.
The two are linked in every hold-period model. Underwriters usually set the exit cap 25 to 75 basis points above the going-in cap, a conservative haircut for the property being older and the forecast being further out at sale. When the exit cap is set below the going-in cap, the model assumes cap rate compression, an aggressive bet that raises projected returns and should be stress-tested.
Frequently Asked Questions
What is a good going-in cap rate?A good going-in cap rate depends on property type, market, and risk, with no single benchmark across the market. A lower going-in cap rate means the buyer is paying more for current income, usually a safer asset, while a higher going-in cap rate offers more entry yield for more risk.
Is going-in cap rate the same as cap rate?Going-in cap rate is a specific type of cap rate measured at acquisition. It uses year-one or stabilized NOI over the purchase price, so it captures the entry yield. The unqualified term "cap rate" can refer to any point in the hold, including the exit.
Should going-in cap rate use in-place or stabilized NOI?It depends on the asset. Stabilized properties use in-place or year-one NOI, giving a clean entry yield. Value-add and development deals often use stabilized NOI to reflect income after lease-up, which produces a higher going-in cap rate than in-place income would.
Related Terms
Cap Rate
Exit Cap Rate
Net Operating Income
Pro Forma
Terminal Value