Going-In Cap Rate: Formula, Example and How It Compares to Exit
The going-in cap rate is first-year NOI over the purchase price. How to calculate it, when to include closing costs, and why it usually sits below the exit cap rate.
By the CapRateCalculator.co team
The going-in cap rate is first-year net operating income divided by the purchase price. It is the yield a buyer starts with on the day of closing. It is the cap rate most people mean when they say a deal “trades at a 6 cap,” and it is the starting point for comparing the purchase with the exit cap rate at sale.
Going-in cap rate formula
Going-in cap rate = year-one NOI / purchase price.
Year-one NOI is the income you expect in the first twelve months of ownership, after vacancy and all operating expenses, before any mortgage. Use your own numbers, not the seller’s. Property taxes in particular should reflect the bill you will pay after the sale, since many counties reassess.
A worked example
The standard house on this site costs $500,000 and rents for $4,000 a month. With 5% vacancy, $6,000 of taxes, $2,500 of insurance and 18% of collected rent for maintenance, reserves and management, year-one NOI is $28,892.
Going-in cap rate on price: $28,892 / $500,000 = 5.78%.
Add $10,000 of closing costs and the going-in cap rate on total cost is $28,892 / $510,000 = 5.67%. Eleven basis points sounds small. On a larger deal with transfer taxes and loan fees, the gap is wider, so be clear about which version you are quoting.
Going-in vs in-place and pro forma
The going-in cap rate is a forward number: the income you expect in the first year you own it. If the property is stable, that is close to the in-place figure. If you plan to raise rents in year one, it sits somewhere between in-place and pro forma. Most buyers keep it close to in-place, because rent bumps take time and lease turnover is slow.
Going-in vs exit cap rate
Investors who model a sale usually set the exit cap rate a little above the going-in rate, often by 25 to 50 basis points. The building will be older at sale, and nobody knows where interest rates or buyer demand will be in five or ten years. Assuming the same or a lower exit rate makes a deal look better than it should.
| Going-in | Exit | |
|---|---|---|
| Prices | The purchase | The sale |
| NOI used | Year one | The year after the sale |
| Usual relationship | Lower | Higher, by a cushion |
The cap rate and interest rate guide covers why cap rates move with borrowing costs, which is the main risk the exit cushion is meant to cover.
Is the going-in cap rate good enough?
Compare it with three numbers. First, the market cap rate for similar properties: a going-in rate well below the market rate means you are paying up. Second, your mortgage constant: if the going-in cap rate is below it, leverage works against you and cash flow suffers. Third, your target return. The what is a good cap rate guide walks through all three.
Frequently asked questions
What is a going-in cap rate?
It is the first-year net operating income divided by the purchase price. It is the yield the buyer starts with on the day of closing, before any rent growth or sale. On the standard $500,000 house with $28,892 of NOI, the going-in cap rate is 5.78%.
What is the difference between going-in and exit cap rate?
The going-in cap rate prices the purchase. The exit cap rate prices the sale at the end of the hold, applied to the NOI expected the year after you sell. Underwriters usually assume the exit cap rate will be higher than the going-in rate, to allow for an older building and less certain markets.
Does the going-in cap rate include closing costs?
It depends on who is calculating it. Brokers quote it on price alone. Many investors divide by total acquisition cost, price plus closing costs and fees, which gives a slightly lower and more honest number. Say which one you mean.