Net operating income is where people go wrong
Cap rate is only as honest as the NOI you feed it, and NOI has a strict definition that sellers routinely stretch.
| Goes into NOI | Stays out of NOI |
|---|---|
| Gross rent, minus a vacancy allowance | Mortgage principal and interest |
| Property taxes | Depreciation |
| Insurance | Capital improvements |
| Property management | Your income tax |
| Repairs and routine maintenance | Loan fees and closing costs |
| Utilities you pay, HOA dues, landscaping |
The two omissions that inflate a listing's advertised cap rate almost every time are vacancy and management. A pro forma at 100% occupancy with no management fee is not a forecast, it is a best case with the label filed off. Put both back in before you compare anything.
What counts as a good cap rate
There is no universal answer, and anyone quoting one is selling something. Cap rate is a price of risk: the market pays more — accepting a lower cap — for income it believes is safe and durable.
- A 4–5% cap in a supply-constrained coastal market usually reflects strong tenant demand and expected appreciation.
- A 9–10% cap in a weaker market is compensating you for vacancy risk, thinner tenant pools and flat prices.
- The same property can look like both, depending on whether the seller's NOI included vacancy.
So a 5% cap is not worse than a 9% cap. They are different bets. The only comparison that means anything is between properties in the same market with NOI computed the same way — which is why you should recompute every seller's number yourself rather than trusting the sheet.
Why you need cash-on-cash as well
Cap rate deliberately ignores financing so that two buildings can be compared as assets. But you are not buying an asset in the abstract — you are buying it with a specific down payment at a specific rate, and that changes everything about the outcome.
Leverage amplifies in both directions. When the cap rate is above your borrowing cost, debt increases your cash-on-cash return above the cap rate. When it is below, the same debt drags your return under water while the property itself looks perfectly healthy. Two buyers can pay the same price for the same building and earn completely different returns.
The numbers you can only get from a real ledger
Cap rate at purchase is an estimate. Cap rate after two years of ownership is a fact — and it is usually lower than the estimate, because real vacancy, real maintenance and real turnover costs have finally shown up.
Tracking actual income and categorised expenses per property is what lets you check your own underwriting instead of repeating it. Rentmark computes net position and yield per property from the payments and expenses you record, so the next offer you make is priced off your own history rather than a broker's pro forma.