Stabilized Cap Rate: NOI After Lease-Up, Explained With an Example
A stabilized cap rate uses NOI once a property is leased up at market rent. How to calculate it, how it differs from the going-in rate, and how to value a lease-up deal.
By the CapRateCalculator.co team
A stabilized cap rate is the cap rate calculated on stabilized NOI: the income a property produces once it is leased to normal occupancy at market rents, with normal operating expenses. It describes the finished property, not the one you are buying. Buyers of lease-up and value-add deals use it to see what the property will yield once the work is done.
Stabilized cap rate formula
Stabilized cap rate = stabilized NOI / price or value.
Stabilized NOI assumes normal occupancy for the market, often around 90 to 95% for apartments, current market rent, and a full set of operating expenses, including management and reserves. It does not include one-time costs of getting there, such as concessions, leasing commissions during lease-up, or renovation.
A lease-up example
A 10-unit apartment building is offered at $1.5 million. Only six units are occupied, and current NOI is $45,000, a 3.0% in-place cap rate.
Once it is leased to 95% at market rent, NOI is projected at $105,000. The stabilized cap rate on the purchase price is $105,000 / $1,500,000 = 7.0%.
That 7.0% ignores the cost of getting there. Say lease-up takes $100,000 in make-ready work, concessions and lost rent. The yield on cost is $105,000 / $1,600,000 = 6.56%.
If stabilized buildings like this one sell at a 6.0% market cap rate, the finished property is worth $105,000 / 6.0% = $1.75 million. The spread between $1.6 million of total cost and $1.75 million of stabilized value is the profit for taking on the lease-up risk.
| Cap rate | Basis | |
|---|---|---|
| In-place | 3.0% | Current NOI on price |
| Stabilized | 7.0% | Stabilized NOI on price |
| Yield on cost | 6.56% | Stabilized NOI on total cost |
| Market (exit) | 6.0% | What stabilized buildings sell at |
Stabilized vs going-in cap rate
On a property that is already stabilized, the going-in cap rate and the stabilized cap rate are the same number. They only differ when the property needs work. A big gap between in-place and stabilized cap rates is the opportunity in a value-add deal, and also the risk, because the stabilized number is a forecast.
How lenders treat stabilized NOI
Permanent lenders size loans on in-place NOI. Bridge and construction lenders look at stabilized NOI but lend a smaller share of it and expect to be refinanced once the property reaches stabilization. Appraisers often report both an “as is” value on current NOI and a “prospective at stabilization” value on stabilized NOI.
Stress-test stabilized NOI the same way you would a pro forma. Check the projected rent against signed leases, not asking rents, and allow more time for lease-up than the plan does.
Frequently asked questions
What is a stabilized cap rate?
It is the cap rate calculated on stabilized NOI: the income a property produces once it is leased up to normal occupancy at market rents, with normal expenses. It describes the property after a lease-up or renovation is finished, not its current state.
What occupancy counts as stabilized?
Usually the normal long-run occupancy for that property type and market, often around 90 to 95% for apartments. Lenders and appraisers often require that level to have held for several months before they treat a property as stabilized.
Is stabilized cap rate the same as yield on cost?
No. Both use stabilized NOI, but yield on cost divides it by everything spent, price plus lease-up and renovation costs. The stabilized cap rate is usually quoted on price or on market value.