Implied Cap Rate: What a Price or a REIT Says About Yield

An implied cap rate is the cap rate a price implies. Divide a property’s NOI by the price on the table and you have the yield that price represents. The term shows up in two places: backing a cap rate out of an asking price, and measuring what the stock market is paying for a REIT’s real estate.

Implied cap rate formula

Implied cap rate = NOI / price.

It is the ordinary cap rate formula. The word implied means the price came first and the cap rate is derived from it, rather than a cap rate being chosen and used to set a price.

Implied cap rate from an asking price

A seller lists the standard house at $500,000. Your rebuilt NOI is $28,892. The asking price implies a 5.78% cap rate.

Compare that with the market cap rate for similar properties. If comps trade at 5.93%, the asking price is a little high. If they trade at 5.5%, it is a good price. The implied cap rate is how you turn an asking price into something you can compare.

Always use your own NOI. An implied cap rate built on the seller’s figures inherits every missing expense in them.

Implied cap rate of a REIT

A REIT’s share price does not show a cap rate directly, but you can back one out. Add up what the market is paying for the whole company: the market value of the common stock, plus debt, plus preferred stock, less cash and non-real-estate assets. That is enterprise value. Divide forward property NOI by it.

Illustrative numbers: a REIT with $6.0 billion of stock market value and $2.5 billion of debt has an enterprise value of $8.5 billion. If its properties produce $500 million of NOI, the implied cap rate is $500 million / $8.5 billion = 5.88%.

What the gap tells you

If similar buildings sell privately at 5.25%, a REIT trading at an implied 5.88% is pricing its properties below private market value. If private deals happen at 6.5%, the REIT is at a premium. Analysts track this spread as one measure of whether the stock looks cheap relative to the buildings it owns.

The comparison has limits. A REIT carries a management team, a development pipeline and access to capital that a single building does not, and its NOI includes properties of mixed quality. Use the implied cap rate as one input next to net asset value estimates, not as the only test.

Implied cap rate in an appraisal

Appraisers also back implied cap rates out of comparable sales: price and NOI of each comp give the rate the buyer accepted. That is how the market cap rate is built, one implied rate per sale. The cap rate valuation guide shows the process end to end.