Cap rate compression and expansion
When interest rates rise, cap rates expand (values fall) because investors demand higher yields. From 2022–2024, multifamily cap rates expanded 100–150bps — translating to 15–25% price drops on the same NOI. Always underwrite to today's cap rate, not the seller's purchase cap from 2021.
What NOI excludes — on purpose
NOI does NOT include mortgage payments, depreciation, capital improvements, or income taxes. That's the point: cap rate compares the asset, not the deal structure. If a broker quotes 'cap rate' including debt service, they're quoting cash-on-cash and calling it the wrong thing.
GRM vs. cap rate
Gross Rent Multiplier (price ÷ gross rent) is a back-of-envelope shortcut — useful for screening but blind to opex. Two properties with identical GRM can have wildly different cap rates if one has $5K/yr higher taxes. Use GRM to screen, cap rate to underwrite.
Related guides
Long-form playbooks on the same topic, written by the RevenueLab editorial team.
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Read the guideFAQ
What's a 'good' cap rate?
Whatever beats your target by enough to justify risk. A 5% cap in a Class A coastal market may be excellent; an 8% cap in a declining rust-belt city may be a value trap. Cap rate is relative to risk.
Why do brokers quote pro-forma cap rates?
To inflate the headline. Pro-forma assumes vacancy at 3%, opex 30%, and market rents. Underwrite to trailing-12 actuals; treat pro-forma as a marketing pitch.
Does cap rate include capex?
Industry standard is to exclude capex from NOI (treating it as below-the-line). For underwriting, set aside 5–10% of EGI as a capex reserve before calling NOI 'real.'
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