Cap rate is an output, not an input. The market hands it to you after a sale closes, calculated backwards from a price somebody actually paid.
So when an owner tells me his building is worth $5.2 million because the cap rate in his submarket is 6 percent, what he has done is guess, with a spreadsheet. And the number in your head for your own building is probably about ten percent high.
If you want the basics of how lenders, buyers, and brokers each value a building, start with What Is My Apartment Building Worth? The next step is what happens when you take that number to market.
The two-sided error that kills deals early
The seller finds the lowest cap rate that traded in his submarket and applies it to his own untouched income statement. Best cap rate, best NOI.
The buyer finds the highest cap rate that traded and applies it to his reconstructed income statement. Worst cap rate, worst NOI.
Both of them think they are being reasonable. On a $5 million building, the gap between those two numbers can be $1 million. Nobody is lying. Both sides are doing the arithmetic in the direction they want it to go.
Look closer and neither side is using the same NOI. Before you argue about cap rate, you have to agree on what the building earns. The buyer will rebuild your income statement before he prices it, and the NOI haircut section of the valuation guide shows how that rebuild works at the lender. Buyers run the same one.
Five filters for a real comp set
A list of recent sales is not a comp set. Run every sale through five filters.
- Unit count in a similar range. A 40-unit building does not price like a nine-unit building. Different buyer pool, different financing.
- Vintage within about a decade. 1960s construction carries different capital risk than a building from the 2000s.
- Same submarket. Not the same city. The same submarket.
- Comparable condition and unit mix. Three all-studio buildings do not comp a building of two-bedroom units.
- The financing behind the comp sale. This is the one owners skip. If a building traded because the buyer assumed an existing loan at 3.5 percent, that price included the value of that loan. It is not a comp for a building being financed at today’s rates. Strip it out, or your asking price will run high and you will never know why.
Three lenses, not one
Once the comp set is clean, look at the number three ways.
Lens one: cap rate on the reconstructed NOI. The buyer’s version of your income, not yours.
Lens two: price per unit against recent trades. Blunt, but it is a fast sanity check, and it is how a lot of buyers think first.
Lens three: gross rent multiplier. Price divided by annual gross income. Crude, but useful.
When all three lenses land in a narrow band, you have a number the market is likely to support. When one of them is far off, that is a signal. Usually it means something in your income statement needs explaining before you list.
CoStar and Crexi will give you the trades. Your broker should give you the context, which is the part that matters. Why did that one trade tight? What was wrong with the one that traded wide? A list of sale prices is data. The reason behind each one is the comp.
If you own in Washington DC, the DC value guide shows why this matters even more there, with recent per-unit sales by neighborhood.
What half a point of cap rate does
Take a building producing $313,000 of net operating income.
| Cap rate | Value |
|---|---|
| 5.5 percent | about $5.7 million |
| 6.0 percent | about $5.2 million |
| 6.5 percent | about $4.8 million |
Nothing about the building changed. Same roof, same tenants, same rents. Going from 5.5 to 6.5 percent, half a point either side of 6, moved the value by about $900,000.
That is why you do not get to pick the cap rate. Buyers, lenders, and rates decide it. What you control is the income, and the income half of the equation is the half worth working on.
Want to see where your own building lands across that kind of range? Get your value range with Value Navigator.
What an asking price ten percent high costs
A building priced ten percent high does not sell ten percent slower. It does not sell at all, for a while. It sits. Buyers who looked at it in month one see it again in month five and assume something is wrong with it. Then it trades below where it would have gone on day one.
Four buildings, four cap rates
Four buildings. Same submarket, same unit count, all sold within about a year of each other. Four different cap rates.
The one that traded tightest had clean books, no deferred maintenance, and every lease in a file.
The one that traded widest had a rent roll that did not tie, three units of deferred capital work, and an owner who would not hand over utility bills.
Same submarket. Same size. The difference in cap rate was not the market. It was the file.
Here is the line that gets pushback. Your building is not worth what the cap rate says. It is worth what your operating statement can defend.
Has yours ever been tested?
Write down your number, then write down where it came from
Before you talk to a broker, write down the number you have in your head for your building. Then write down where it came from.
That second part matters most. If the answer is the best cap rate in your submarket times your own untouched NOI, you have the seller’s half of the two-sided error. Run your comps through the five filters, check the result through all three lenses, and see whether the band holds.
Thinking about selling in the next year or two? Use the Exit Navigator Scorecard to check whether your file is the one that trades tight or the one that trades wide.
Frequently asked questions
How do I price my apartment building for sale? Build a real comp set first, then test the number through three lenses: cap rate on the buyer’s reconstructed NOI, price per unit against recent trades, and gross rent multiplier. When all three land in a narrow band, you have a number the market is likely to support.
Can I just apply my submarket’s cap rate to my NOI? No. A cap rate is an output, calculated backwards from a price somebody actually paid. Applying the lowest cap rate in your submarket to your own untouched income statement is a guess with a spreadsheet, and it probably lands about ten percent high.
What makes a sale a real comp for my building? Five filters. A similar unit count, a vintage within about a decade, the same submarket, comparable condition and unit mix, and financing that matches today’s. A sale where the buyer assumed a 3.5 percent loan included the value of that loan, so strip it out.
What happens if my building is listed too high? A building priced ten percent high does not sell ten percent slower. It sits. Buyers who saw it in month one see it again in month five and assume something is wrong with it, and it then trades below where it would have gone on day one.