Platform · Glossary
Operating cap rate.
Operating cap rate is the property’s modeled annual net operating income divided by the purchase price used in the analysis. It shows the operating yield produced by the property before financing is considered.
Formula
Operating cap rate = Net Operating Income (NOI) ÷ Purchase Price
Example: if a property produces $24,000 of modeled annual NOI at a $400,000 purchase price, its operating cap rate is 6.0%.
Why 3Y shows operating cap rate
Operating cap rate helps investors understand how much income the property produces relative to its analyzed purchase price.
It is an unlevered measure: it evaluates income before the effects of down payment, interest rate, loan term, and debt payments. That makes it useful for understanding the property’s operating economics, but it does not show whether the financing structure meets the investor’s goal.
In a 3Y analysis, operating cap rate is a supporting deal metric. The primary purchase-price output is the 3Y Estimate™ — the goal-convergent price supported by the property’s modeled financial profile and the investor’s selected goal.
Operating cap rate versus financing-aware measures
Operating cap rate answers:
How much modeled operating income does this property produce relative to the analyzed price, before financing?
Other metrics answer different questions:
| Measure | Question it answers |
|---|---|
| Operating cap rate | What unlevered income yield does the property produce at this price? |
| Cash-on-cash return | What annual cash flow does the investor receive relative to cash invested? |
| DSCR | How comfortably does NOI cover annual debt service? |
| Cash velocity | How much monthly net cash flow does the property produce per unit? |
| 3Y Estimate™ | What price can the investor’s selected goal support under the assumptions? |
A property’s operating cap rate may look attractive before financing, while its cash-on-cash return or DSCR may be weak after financing terms are applied. Investors should read the measures together rather than relying on any single metric.
When operating cap rate can mislead
Operating cap rate is only as useful as the modeled income and expense assumptions behind the NOI. It can look stronger than the eventual result when assumptions understate or overlook:
- vacancy;
- repairs and maintenance;
- capital reserves;
- property taxes;
- insurance;
- property management costs; or
- changes in achievable rent.
Operating cap rate also does not account for financing terms or debt payments.
Use operating cap rate to understand modeled operating yield. Use financing-aware metrics to understand the effect of the loan structure, and use the 3Y Estimate™ to see the goal-convergent price supported by the selected goal and assumptions.