Definition
The Going-In Cap Rate is the capitalization rate calculated at the time of acquisition.
It measures the property’s initial unlevered yield based on its current Net Operating Income (NOI) and the purchase price.
Formula
- Going-In Cap Rate = Current NOI ÷ Purchase Price
Example
If a property produces $900,000 in current NOI and is purchased for $15,000,000:
- Going-In Cap Rate = $900,000 ÷ $15,000,000 = 6.0%
What It Represents
- Initial yield at acquisition
- Baseline income return before financing
- Market pricing relative to income
Going-In Cap Rate vs. Market Cap Rate
- Market Cap Rate: Prevailing benchmark in the market.
- Going-In Cap Rate: Actual rate based on your purchase price.
If you buy below market value, your going-in cap rate may exceed the market cap rate.
Going-In Cap Rate vs. Exit Cap Rate
- Going-In: Based on acquisition NOI.
- Exit Cap Rate: Assumed rate at resale based on projected future NOI.
Conservative underwriting typically assumes an equal or higher exit cap rate to account for market risk.
Limitations
- Does not account for future rent growth.
- Does not consider financing structure.
- Ignores capital expenditures.
- May mislead in transitional or value-add deals.
When It Matters Most
- Core and stabilized investments
- Comparing multiple acquisition opportunities
- Evaluating pricing discipline
Investor Discipline
Investors compare the going-in cap rate to:
- Their required return
- Prevailing market cap rates
- Their underwritten NOI
If the going-in cap rate is too low relative to risk, disciplined investors either renegotiate or walk away.