How Do I Calculate Cap Rate and Other Investment Metrics?

Cap rate: the anchor formula

Cap rate (capitalization rate) = net operating income ÷ purchase price, expressed as a percentage. It answers one question: if you bought this building all-cash, what annual yield would the current operations pay you? Because it leaves financing out, it is the cleanest way to compare properties with each other and with where the market is pricing risk. Manhattan cap rates in 2026 run roughly 3.75–4.75% on prime retail and 4.5–5.5% on free-market multifamily and Class A office, with rent-stabilized multifamily at 5.5–7%+. See Manhattan cap rates by asset class for the full matrix.

Flip the formula and it becomes a pricing tool: value = NOI ÷ cap rate. If comparable buildings trade at a 5% cap and yours produces $500,000 of NOI, the market-implied value is $10M, and every $1 of NOI you add is worth $20 of value at that cap rate. That multiplier is why lease-up, expense control, and tax appeals move NYC building values so sharply, and why a 50 basis point move in cap rates, up or down, swings values 8–10%. For the full treatment, read our NYC cap rates explained guide.

NOI: the number everything else depends on

Net operating income = effective gross income − operating expenses. Effective gross income is scheduled rents plus other income (laundry, antenna, billboard, retail percentage rent), minus a vacancy and credit-loss allowance. Operating expenses include real estate taxes, insurance, utilities, repairs and maintenance, payroll, and management. They exclude debt service, income taxes, depreciation, and capital expenditures. Sellers inflate NOI at the edges of those definitions: an offering memorandum that leaves out a realistic management fee (3–4% of collections) or understates NYC real estate taxes after the post-sale reassessment overstates NOI, and therefore price.

Always rebuild NOI from the source documents (rent roll, leases, tax bills, utility history) instead of accepting the broker pro forma. In NYC, be especially suspicious of the tax line. Assessments often reset after a sale, and the gap between the seller’s tax bill and yours can wipe out 50+ basis points of yield. Run your own numbers through the NOI calculator before you quote a cap rate.

How to run the full analysis, step by step

This is the sequence professionals follow when a deal lands on the desk:

1. Rebuild effective gross income. Start from the actual rent roll, add ancillary income, and subtract a vacancy/credit-loss allowance (3–5% for stabilized NYC multifamily, more for office and retail).
2. Subtract true operating expenses to get NOI. Use real tax bills adjusted for post-sale reassessment, real insurance quotes, and a market management fee, not the offering memorandum’s numbers.
3. Divide NOI by the asking price to get the cap rate, then compare it with submarket comps for the same asset class and regulation profile to judge whether the pricing is rich or cheap.
4. Model the debt and compute DSCR. Divide NOI by annual debt service; if the result is below the lender’s 1.20–1.25x floor, size the loan down until it clears.
5. Compute cash-on-cash. Subtract annual debt service from NOI, then divide by total cash in (down payment, plus NYC closing costs of roughly 3–5%, plus immediate capex).
6. Project the hold and estimate IRR. Model rent growth, expense growth, capex, and a refinance or sale at an exit cap rate, and let the full cash-flow timeline produce the return. This is where 5-to-10-year hold decisions get made.

Note the order: income first, price second, debt third. Investors who start with the financing and back into the value end up with the answer the lender's spreadsheet wants, which may not be the one the building supports.

A worked NYC example with realistic numbers

Take a Manhattan mixed-use building asking $10,000,000: eight free-market apartments and two retail units producing $820,000 of scheduled gross income. Apply a 4% vacancy/credit allowance (−$32,800) for $787,200 of effective gross income. Operating expenses: $180,000 real estate taxes, $38,000 insurance, $52,000 utilities and maintenance, and $31,500 management (4%), for a total of $301,500. NOI = $485,700. Cap rate = $485,700 ÷ $10,000,000 = 4.86%, roughly in line with free-market Manhattan multifamily comps at 4.5–5.5%.

Now the debt. A lender offers 60% LTV, but check the coverage. A $6M loan at 6.25% on 30-year amortization costs about $443,300 a year, so DSCR = $485,700 ÷ $443,300 = 1.10x, below the 1.25x floor. The loan resizes to about $4.8M (annual debt service ≈ $354,600, DSCR ≈ 1.37x). Cash required: $5.2M down + ~$400,000 closing costs = $5.6M. Cash flow after debt service = $485,700 − $354,600 = $131,100. Cash-on-cash = $131,100 ÷ $5,600,000 = 2.3%. GRM = $10M ÷ $820,000 = 12.2x.

A 2.3% cash-on-cash against a 4.86% cap rate is negative leverage: you are borrowing at a rate above the property's unlevered yield, and that is the current reality across much of Manhattan. The deal works only if the growth story (rent upside, tax certiorari, a refinance at lower rates, or exit cap compression) carries the IRR. Experienced buyers don’t walk away over that. They underwrite the IRR, and in 2026 the IRR, more than the going-in yield, decides institutional deals.

GRM, IRR, and when each metric earns its place

Gross rent multiplier = price ÷ gross annual rent. It ignores expenses entirely, so it is useless for decisions and handy for screening: Manhattan free-market multifamily commonly screens at 11–14x GRM, and a listing at 18x rules itself out before you waste an afternoon on it. Cash-on-cash and DSCR are the levered lenses, one for your equity and one for your lender, and DSCR, more than LTV, is increasingly what sizes NYC loans.

IRR (internal rate of return) is the discount rate that sets the net present value of all cash flows (purchase, annual cash flow, refinance proceeds, and sale) to zero. Put simply, it is the annualized return on every dollar for exactly as long as that dollar was invested. It is the only metric that captures timing, which is why value-add and conversion deals with back-loaded profits get underwritten on IRR instead of cap rate. A conversion buyer purchasing a vacant office building, the logic behind Skyline Properties’ $135M sale of 6 East 43rd Street, may accept a 0% going-in yield because the residual value at completion drives a strong levered IRR.

Where the metrics mislead in NYC specifically

Watch for three NYC traps. First, regulation. A 6% cap on an 80% rent-stabilized building and a 6% cap on a free-market building are entirely different investments; the stabilized building’s NOI growth is capped by law, so the same going-in yield can mean very different IRRs. Second, taxes. NYC reassessment risk means the seller’s NOI is not your NOI, so underwrite the tax line forward. Third, specialty assets break cap-rate logic altogether. Ground-lease fee positions like Skyline Properties’ $65M, 99-year ground lease at 236 Fifth Avenue trade at 3–5% yields on ground rent because buyers price them like long-duration, inflation-linked bonds, and prime retail like the record $50M, $16,667/SF sale at 131-133 Prince Street trades on scarcity and price per SF as much as on income.

Treat cap rate as a price quote. It tells you what the market pays for a dollar of income in that submarket and asset class. Whether that dollar of income can grow, and at what risk, is the real analysis. Our guide to valuing commercial property covers the income, sales-comparison, and cost approaches professionals weigh against each other.

How Skyline Properties approaches underwriting and pricing

Every Skyline Properties pricing opinion is built the way this article describes. We rebuild NOI from source documents, draw cap rates from real closed comps (including our own off-market investment sales, which never show up in public databases), and run a levered check against current debt terms. That is how we defend pricing to institutional buyers on everything from stabilized multifamily to conversion candidates and ground leases.

Run your own numbers with the cap rate calculator, then request a confidential Broker Opinion of Value. Skyline Properties returns a defensible range with comp support, at no cost and with no obligation.