Given The Following Information Calculate The Going-Out Cap Rate

The going-out cap rate is a key financial metric used to evaluate the income-generating potential of a property. This calculator helps you determine the cap rate based on the property's net operating income and purchase price.

What is the going-out cap rate?

The going-out cap rate, also known as the initial cap rate, is the capitalization rate used when a property is first purchased. It represents the annual net operating income (NOI) divided by the purchase price of the property, expressed as a percentage.

This metric is commonly used in real estate investing to assess the potential return on investment (ROI) of a property. A higher cap rate typically indicates a more attractive investment opportunity, while a lower cap rate may suggest a less profitable property.

Cap rate formula

The cap rate is calculated using the following formula:

Formula

Cap Rate = (Net Operating Income / Purchase Price) × 100

Where:

Net Operating Income (NOI) - The total income generated by the property after deducting operating expenses but before considering interest, taxes, depreciation, or amortization.
Purchase Price - The total cost to acquire the property, including any closing costs.

The result is expressed as a percentage, representing the annual return on the property's investment.

How to calculate the going-out cap rate

To calculate the going-out cap rate, follow these steps:

Determine the property's net operating income (NOI) for the most recent 12-month period.
Identify the purchase price of the property, including any closing costs.
Divide the NOI by the purchase price.
Multiply the result by 100 to convert it to a percentage.

Use our calculator above to perform these calculations quickly and accurately.

Example calculation

Let's walk through an example to illustrate how to calculate the going-out cap rate.

Scenario

A real estate investor purchases a commercial property for $500,000. The property generates $60,000 in annual net operating income (NOI).

Calculation

NOI = $60,000
Purchase Price = $500,000
Cap Rate = ($60,000 / $500,000) × 100 = 12%

In this example, the going-out cap rate is 12%. This indicates that the property generates 12% of its purchase price in annual net operating income.

Interpreting the result

Interpreting the cap rate requires understanding the context of the property and the market. Here are some general guidelines:

High cap rates (typically above 10%) - Often indicate attractive investment opportunities with strong income potential.
Average cap rates (typically 6-10%) - Represent properties with moderate income potential, common in many real estate markets.
Low cap rates (typically below 6%) - May indicate properties with lower income potential or higher purchase prices.

Always consider other factors such as location, market trends, and property condition when evaluating a cap rate.

Frequently asked questions

What is the difference between cap rate and cash-on-cash return?

The cap rate is based on the property's net operating income and purchase price, while the cash-on-cash return considers the actual cash flow from the investment, including financing costs. The cash-on-cash return is generally considered a more accurate measure of an investor's actual return.

How does the going-out cap rate differ from the stabilized cap rate?

The going-out cap rate is calculated using the property's actual income and purchase price, while the stabilized cap rate assumes the property will achieve its full income potential after renovation or improvement costs. The stabilized cap rate is often used to evaluate the potential return on a property after it has been fully renovated.

What factors can affect the going-out cap rate?

Several factors can affect the going-out cap rate, including the property's location, market conditions, income potential, operating expenses, and the purchase price. Additionally, the timing of the purchase and the property's condition at the time of acquisition can impact the cap rate.