Going-In Cap Rate

The Going-In Cap Rate, also known as the "initial cap rate" or "purchase cap rate," is a real estate term that refers to the cap rate based on the original purchase price and the net operating income (NOI) at the time of purchase.

To calculate the going-in cap rate, you divide the NOI of the first year by the purchase price of the property. Here's the formula:

Going-In Cap Rate = Year 1 NOI / Purchase Price

The going-in cap rate is an important metric for real estate investors because it provides an estimate of the initial return on investment, assuming the property is purchased outright and not financed. It helps an investor understand the relationship between the risk associated with the property and the income it generates.

Investors often use the going-in cap rate to compare different investment opportunities. If a property has a higher going-in cap rate, it may offer a higher initial return, but it could also suggest greater risk. Conversely, a lower going-in cap rate might indicate a lower return but also a safer investment.

It's crucial to remember that the going-in cap rate is a snapshot in time and doesn't account for changes in income or property value over time. Other factors, such as growth projections, location, and property condition, should also be considered when evaluating a potential investment.