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.

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