In one sentence
The capitalization rate at acquisition, based on in-place or first-year net operating income relative to the purchase price.
The longer version
The going-in cap rate reflects a property's yield at the moment of purchase, using current income. It is the starting point against which value-add plans and exit assumptions are measured.
A low going-in cap rate signals a richly priced acquisition, which lenders weigh against the business plan and the exit assumptions.
Common questions
- How is a going-in cap rate calculated?
- Divide in-place or first-year net operating income by the purchase price. $600,000 of NOI on a $10,000,000 purchase is a 6 percent going-in cap rate.
- Why does the going-in cap rate matter?
- It shows the initial return the buyer is paying for and is a basis for comparing pricing across similar properties.
- How does the going-in cap rate relate to the exit cap rate?
- Underwriting usually assumes an exit cap rate at or above the going-in rate, to avoid relying on cap rate compression for returns.
Keep reading