Cap rate is not a return, and the number in the brochure is usually not the cap rate

The capitalization rate is net operating income divided by price. It is a way to compare two buildings, not a forecast of what an investor will earn: it has nothing to say about leverage, taxes, depreciation or what happens on resale. Where the number gets bent is the NOI. By definition it excludes debt service and capital expenditures, but it should include everything else that keeps the building running — insurance at the real renewal number, taxes at the reassessed value rather than the seller's protected one, management at a market rate even when the seller manages it themselves, and a genuine allowance for vacancy and for turning units. Three habits catch most of it. Underwrite insurance from an actual quote, not from last year's bill. Ask the county what the taxable value becomes after the sale, because a long-held property can be assessed far below what a buyer will pay. And add a reserve line for roofs, systems and turnover even if the seller's statement has none. Once the NOI is honest, the cap rate becomes what it is supposed to be: a comparison between this building and the next one, at the same moment, in the same market. The follow-on metric for anyone borrowing is debt service coverage — NOI divided by the annual debt payment. That is the number the lender is actually underwriting, and it is where an optimistic NOI turns into a declined loan. This article is general information, not legal, tax or financial advice. Rules change and every deal is different — check your own case with a licensed professional. Alberto Zaltzberg — Adonait · adonait.com