What Is Going-In Cap Rate?
The going-in cap rate is a property's cap rate at purchase: projected first-year net operating income divided by the purchase price. It is the starting yield an investor buys, and the benchmark later compared with the exit cap rate and with yield on cost.
Going-In Cap Rate in plain English
The going-in cap rate is the yield you buy: first-year NOI divided by the purchase price. A $1 million building with $60,000 of first-year NOI has a 6% going-in cap rate.
It is the anchor for a projection: investors compare it with the exit cap rate they assume when selling and with the yield on cost of building new.
Formula
Going-In Cap Rate = Year 1 NOI ÷ Purchase Price × 100- Year 1 NOI
- Projected net operating income for the first year of ownership.
- Purchase Price
- The contract price, sometimes including closing costs.
Worked example
Going-in and exit cap rates on a five-year hold
Illustrative example - round numbers, not current market data. Calculated with Reaixo's calculator engines.
Assumptions
- Purchase price
- $1,000,000
- Year 1 NOI
- $60,000
- NOI growth
- 3% a year
- Exit cap rate (half a point above going-in)
- 6.5%
| Step | Calculation | Result |
|---|---|---|
| 1. Going-in cap rate | $60,000 ÷ $1,000,000 × 100 | 6.0% |
| 2. Year 6 NOI (the year after the sale) | $60,000 × 1.03⁵ | $69,556 |
| 3. Projected sale price | $69,556 ÷ 6.5% | $1,070,099 |
Projected sale price: $1,070,099. Even with NOI up about 16%, assuming a higher exit cap rate holds the projected sale to $1,070,099. At a 6.0% exit cap the same NOI would be worth $1,159,274 - the exit cap rate is often the single largest assumption in a projection.
What this calculation leaves out
- The convention is to capitalize the NOI of the year after the sale, because that is the income the next buyer is paying for.
- Selling costs are deducted from the sale price before calculating returns.
Calculate Going-In Cap Rate
Cap rate calculator
Annual NOI ÷ Property Value × 100
Why it matters
If the exit cap rate ends up higher than the going-in rate, the same NOI sells for less, so the spread between the two is one of the most sensitive assumptions in a projection.
When Going-In Cap Rate is used
- Underwriting an acquisition and comparing it with market cap rates.
- Setting the exit cap rate assumption relative to the going-in rate.
- Explaining to investors what yield the purchase price represents.
Common mistakes
- Using the seller's pro forma NOI instead of a realistic first-year figure.
- Mixing trailing and forward NOI when comparing deals.
- Assuming the exit cap rate will equal or be lower than the going-in rate.
Going-In Cap Rate vs. Exit Cap Rate
The cap rate at the moment of purchase — first-year projected NOI divided by the purchase price.
The cap rate assumed at the end of the holding period, used to estimate resale value from projected future NOI.
Exit cap rates are typically assumed somewhat higher than going-in cap rates, building in a margin of safety for the uncertainty of forecasting years ahead.
Compare and common questions
Going-In Cap Rate: frequently asked questions
What is the difference between going-in cap rate and cap rate?
The going-in cap rate is a cap rate measured at purchase, using first-year NOI and the purchase price.
Should the exit cap rate be higher than the going-in cap rate?
Usually, yes. Many underwriters assume a slightly higher exit rate because the building will be older and future markets are uncertain.
Does the going-in cap rate include closing costs?
It depends on the analyst. Some divide by price alone and others by total acquisition cost; state which one you use.
More Investing Terms
Recommended next step
Calculate the going-in rate from your first-year NOI and price.
Cap rate calculator →Apply it to a specific property: Cap Rate Analysis.
Sources and review
No regulator defines this term; the page follows common industry practice.
Where this applies: Not regulated. Investment and valuation ratios are industry and appraisal conventions; lenders, appraisers and analysts may define inputs differently, so check how a figure was calculated.
Last reviewed: · Updated:
Examples use illustrative figures; rules of thumb are labelled as such. Rates, limits and program rules change - confirm current figures with your lender or a qualified professional.
This definition is provided for general educational purposes and is not financial, legal, tax, or real estate advice. Verify important decisions with appropriately qualified professionals.
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