True Cap Rates - Why Big Inconsistencies

18901 · Member since 2015 · 43 posts · 12 votes

I am curious as to why there is such a large disparity in how a true cap rate is determined? Why there isn’t an agreed upon method of arriving at true cap rate before listing a property for sale.

It seems that most sellers and many agents will list a property and leave out expenses like vacancy rate, repair set aside, management fees allowance and Capex set aside, etc.

What is everyone’s feelings on using these other “expenses” when calculating a true Cap rate for a deal?

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Bo SmithPro Member

Hinton, WV · Member since 2026 · 1k+ posts · 373 votes

7mo

Because there's no enforcement mechanism - listing agents get paid to make deals look attractive, not accurate. Most sellers don't even know their real expenses anyway. I always add 15% buffer to any pro forma for the stuff they conveniently forgot. What's the wildest expense you've seen left out?

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Pierre Guirguis
Lender · Marlboro, NJ · Member since 2025 · 243 posts · 150 votes
7mo
From a lender standpoint, the inconsistency exists because marketing cap rate isn’t underwriting cap rate.

Listings often show cap based on in-place numbers. Lenders underwrite with vacancy, management, repairs, and sometimes reserves built in, even if the seller doesn’t include them.

So the “true” cap rate usually gets recalculated during underwriting.

There’s no universal method because one is marketing, the other is risk control. The deals that close cleanly are the ones where those two numbers aren’t far apart.
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Bo SmithPro Member
Hinton, WV · Member since 2026 · 1k+ posts · 373 votes
7mo
Because there's no enforcement mechanism - listing agents get paid to make deals look attractive, not accurate. Most sellers don't even know their real expenses anyway. I always add 15% buffer to any pro forma for the stuff they conveniently forgot. What's the wildest expense you've seen left out?
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Stevan Stojakovic
Financial Advisor · FL · Member since 2024 · 466 posts · 110 votes
7mo
Because “cap rate” isn’t a regulated metric - it’s a model output.

Sellers model attractiveness.
Buyers model survivability.
Lenders model risk.

That’s why numbers drift.

Personally, I never trust an advertised cap. I rebuild it using stabilized assumptions: vacancy, management (even if self-managed), repairs, and CapEx. Not because I'm pessimistic - because buildings age and cash flow fluctuates.
A cap rate without normalized expenses is just marketing yield.

All the best,
Stevan
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Ian Stuart
Lender · Seattle, WA · Member since 2017 · 118 posts · 161 votes
7mo
True cap rates - as you describe - are stabilized cap rates. IE - what the cap rate will be after the property is renovated / repositioned / etc.

Lots of these value add deals / repositioning deals are being purchased by syndicators at "going in" cap rates far below reasonable stabilized market cap rates. Reason being - after making renovation and increasing rents - that low "going in" cap rate of 4.75%-5.50% will trend to a 6.00%-7.50% in short order.
When thinking about cap rates, you really need to be thinking in terms of "exit" cap rate. IE - the cap rate / yield the property will generate after you reposition it after taking into account renovation costs / etc.
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Frank PyleBusiness Member
Specialist · USA · Member since 2024 · 279 posts · 130 votes
7mo
Cap rate only means anything if the NOI is realistic, and most listings are using a rosy NOI that skips vacancy management repairs and capex because it makes the deal look cleaner on the front end, so I just run my own quick back of napkin every time by taking annual rent and knocking off a vacancy buffer plus management even if you self manage plus a simple maintenance and capex reserve, then subtract taxes insurance and any owner paid utilities and divide what is left by the price and that number is the cap rate I trust. If you want to level set fast, ask the seller for the trailing 12 months income and expenses and the current rent roll so you can compare their cap to actuals.
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Greg Kasmer
Rental Property Investor · Philadelphia, PA · Member since 2021 · 778 posts · 504 votes
7mo
@Rick Bevilacqua - I've seen similar things you mention, but agree with others in that it's both brokers and owners trying to sell an asset for it's highest value. Determining the true/stabilized NOI, cap rate, and value is the goal of a buyer. Good Luck!
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Drew SygitBusiness Member
Property Manager · Royal Oak, MI · Member since 2012 · 12k+ posts · 9k+ votes
7mo
Don't forget the rosey numbers used by Wholesalers 🤣
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Henry Lazerow
Real Estate Agent · Chicago, IL · Member since 2017 · 2k+ posts · 2k+ votes
7mo
I see this from the south side chicago multifamily brokers. It is hilarious they put 5% vacancy in some D area where you might collect 80% of the rent if your lucky. They put no turnover or eviction costs other then basic maintenance, etc. You always need run your own numbers.
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Dan Rowley
Investor · Cary, NC · Member since 2012 · 218 posts · 196 votes
7mo
which cap rate are you referring to ;) let's see... there's the going in cap rate, tax/insurance adjusted cap rate, broker cap rate (which is usually fluff!) and underwritten (stabilized) cap rate. As a buyer, they are fine for reference, but none of these cap rate matter much except the one you as a buyer calculate for AFTER you've acquire the property.
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