Going-In Cap Rate Explained: What You're Really Buying on Day One

What it is

The going-in cap rate is simple: it's the first-year net operating income divided by the price you pay. If a property throws off $100,000 in NOI and you pay $2,000,000, your going-in cap rate is 5%. That's it. It's the yield you're buying at on day one, before you touch anything.

Everybody in this business leads with this number. When a broker calls me and says "I've got a 6 cap," this is the number they mean.

How it plays out in retail net lease

In net lease, the going-in cap rate is unusually clean, and that's exactly why people lean on it. You've got a single tenant, a long lease, and rent that's spelled out on paper for years. The NOI isn't a guess the way it is on an apartment building, it's the contract rent, minus whatever few expenses you actually carry.

So the going-in cap rate on a net-lease deal is close to what you'll really see land in your account in year one. That's the appeal.

Here's how I look at it. The cap rate is the market pricing three things at once: the strength of the tenant, the length of the lease, and the quality of the real estate underneath. A lower going-in cap generally means the market sees less risk: a strong credit tenant, many years left, a good corner. A higher going-in cap usually means the market wants to be paid more to take something on: shorter term, a weaker guarantee, a secondary location, an aging building.

The mistake I see buyers make is treating a high going-in cap as a bargain. Sometimes it is. Often it's the market telling you something you haven't figured out yet.

What to watch for

• Is the NOI real or projected? Going-in should be based on in-place, contractual rent. If the number leans on a renewal, a rent bump that hasn't hit, or "market rent," it's not really a going-in cap.
• How much lease term is left. A 5% cap with fifteen years remaining is a very different animal than a 5% cap with three years left and a decision looming.
• Who's actually on the guarantee. Corporate versus a single franchisee changes the risk, even when the sign out front is identical.
• What expenses you truly carry. "Net" isn't always net. Roof, structure, and management can quietly live on your side of the ledger.
• Rent versus the market. If the in-place rent sits well above what the space would re-lease for, your clean going-in number is sitting on a soft foundation.

How to use it to your advantage

Use the going-in cap rate as your entry point, not your conclusion. It tells you what you're paying for today's income, a fair, honest starting line. Then do the work it doesn't do.

I stack the going-in cap against the lease term, the rent bumps, and a realistic view of what happens at expiration. A modest going-in cap with strong escalators and a location I'd happily re-lease can beat a fat going-in cap that stalls out the day the tenant's term ends.

Run the going-in number, then ask what your yield looks like in year five and year ten. That comparison, where you start versus where the contract takes you, is where the real decision lives.

Best case, worst case

Best case:

• You buy at a healthy going-in cap on in-place, contractual rent.
• Long term remains, with built-in escalators that lift your yield over time.
• The real estate stands on its own, so you'd re-lease or sell without sweating the tenant.

Worst case:

• A tempting going-in cap turns out to rest on near-expiration rent or a thin guarantee.
• If a location were to go dark, you're holding a specialized box that's slow and costly to backfill.
• In-place rent sits above market, so any re-lease resets your income down, and the clean going-in number was never the whole story.

---

This is general education, not investment, tax, or legal advice. Verify every figure and assumption independently before you act.