Cap Rate Sensitivity Analysis: How Much Value Moves per 25 Basis Points

A cap rate sensitivity analysis shows how far a property’s value moves when the cap rate or the NOI changes by a small amount. On the standard example used across this site, a $500,000 house producing $28,892 of NOI at a 5.78% cap rate, one 25 basis point step in the cap rate is worth about $21,000, a little over 4% of the price.

That is the number an offer turns on. The income approach to valuation gives you one answer from one cap rate. A sensitivity grid gives you the whole range, which is where the negotiation actually happens.

Why a quarter point of cap rate moves price more than you expect

Value is NOI divided by cap rate. You are dividing by a small number, and small changes to a small denominator do a lot of work.

The shortcut: a 25 basis point rise cuts value by roughly 0.25 divided by (cap rate + 0.25). At a 5% cap rate that is 4.8%. At 6% it is 4.0%. At 8% it is 3.0%.

So the same quarter point costs a low cap rate buyer more than a high cap rate buyer, in percentage terms and in dollars. A basis point is one hundredth of one percent, and 25 of them is the smallest step most markets really price.

That is also why market wide moves hit hardest at the low end. The guide on cap rate compression and expansion covers why those moves happen. The grid below is how you price one.

Build the grid: NOI across the top, cap rate down the side

1. Put your defensible NOI in the center column. For the standard example that is $28,892, built from $48,000 of rent, 5% vacancy, $6,000 of taxes, $2,500 of insurance and 18% of collected income for maintenance, reserves and management.
2. Add one column 5% below and one 5% above, so $27,447 and $30,337. That brackets the usual errors in rent, vacancy and repair costs.
3. Run cap rates down the side in 25 basis point steps. Center them on the market cap rate you pulled from comparable sales, then go three steps each way.
4. Fill each cell with NOI divided by cap rate.
5. Mark the asking price inside the grid. You can now see which assumptions have to be true for that price to work.

How much value moves per 25 basis points

At a 5.78% cap rate on $28,892 of NOI, each 25 basis point step changes value by about $21,000. The dollar step shrinks as the cap rate climbs: roughly $27,500 per quarter point near 5%, about $19,000 near 6.25%, about $15,000 near 7%. Hold NOI steady and that pattern never changes.

Cap rate	Value of $28,892 NOI	Drop from the row above
5.00%	$577,840
5.25%	$550,324	$27,516
5.50%	$525,309	$25,015
5.75%	$502,470	$22,839
6.00%	$481,533	$20,937
6.25%	$462,272	$19,261
6.50%	$444,492	$17,780
6.75%	$428,030	$16,462
7.00%	$412,743	$15,287

The $500,000 asking price sits between the 5.75% and 6.00% rows. The property’s own cap rate of 5.78% prices it at $499,862, which is the same statement in different units.

A buyer who requires a 6.50% cap rate values that identical income at $444,492. Nothing about the building changed. The $55,000 gap is pure required yield.

Flexing NOI and cap rate together in one view

Cap rate	NOI $27,447	NOI $28,892	NOI $30,337
5.25%	$522,800	$550,324	$577,848
5.50%	$499,036	$525,309	$551,582
5.78%	$474,862	$499,862	$524,862
6.00%	$457,450	$481,533	$505,617
6.25%	$439,152	$462,272	$485,392

Read across the 5.78% row and a 5% miss on NOI is worth exactly $25,000. Read down it and a quarter point of cap rate is worth about $21,000. So a quarter point of cap rate costs about what a 4% error in NOI costs.

Put another way, a $1,200 argument over annual management expense moves value about as much as a quarter point does, roughly $21,000.

The cell an informed, typical buyer would land on is the property’s market value. The cells around it are what buyers with different return targets would pay for the same income. Appraisers working the income approach run this exercise too, then defend a single cell in writing.

Turning a cap rate into a price multiple

A cap rate inverts into a multiple of NOI. Divide 1 by the cap rate.

Cap rate	Multiple of NOI
5.00%	20.00x
5.78%	17.30x
6.00%	16.67x
6.50%	15.38x
7.00%	14.29x
8.00%	12.50x

Multiples help when cap rate numbers stop feeling like money. Paying 17.30 times income rather than 16.67 times is a plain way to say what 22 basis points costs. The capitalization rate and the multiple carry the same information, the way a bond’s yield and its price do.

The simple tab shows the clean version: $30,000 of NOI on a $500,000 price is a 6% cap rate, which is 16.67 times income, or $16,667 of value for every $1,000 of annual NOI.

How buyers and lenders use the grid in a bid

Buyers use it to set a walk away price before they fall in love with a property. Pick the cap rate you need, pick the NOI you can defend, and the cell where they meet is your number. Anything above it has to be justified by something the grid does not capture.

Lenders use it through the appraisal. At 70% loan to value, the 5.78% cell supports a loan of $349,903. Two 25 basis point steps up, at 6.25%, it supports $323,590. Same building, same rent, about $26,000 more cash from your pocket.

Sellers run it backwards. If the grid says a 5.78% cap rate buyer pays $499,862 and a 6.25% buyer pays $462,272, the listing price tells you which buyer you are waiting for.

Anyone holding for a set number of years runs the grid twice, once on the going in cap rate and once on the exit cap rate, where the answer is the terminal value. Exit assumptions are guesses. A grid is the honest way to show a guess.

Run the grid on your own property

Enter your rent, vacancy, taxes, insurance and percentage costs into the free Cap Rate Calculator on the home page. It returns the cap rate, the value at a target cap rate and the rent needed to support a given price. Change the target cap rate by 25 basis points and read the new value. Do that six times and you have your own sensitivity grid in about a minute.