How implied cap value works

A cap rate is this year's net operating income over price. Run the same identity backwards and you have a value:

$$V = \frac{\text{NOI}}{\text{cap}}$$

On $36,000 of NOI, the asking price is $480,000, so the property's own cap is 7.50 percent. At a 6 percent comparison cap the same income is worth $36000 / 0.06 = 600000$, $600,000. The gap is $600000 - 480000 = 120000$, so $120,000 below that implied value.

How cap rates work owns the 7.50 percent. This page owns the $600,000. Cap rate against implied value is the yield against the price, on one sheet.

The cap rate calculator on this page prints both. The cap rate explorer holds NOI still and lets you drag the comparison cap. Watch implied value move.

NOI $50,000, price $625,000. Own cap 8 percent. At a 7 percent comparison cap that income is worth $50000 / 0.07 = 714285.71$, $714,285.71. The gap is $89,285.71 below that value.

Two buildings, two caps, one comparison rate each, and the gap is now in money rather than in percentage points. The first sheet's $120,000 below is not a larger bargain than $89,285.71 because the incomes and the comparison caps are different. Line the gaps up only after the comparison cap is the same object.

On the first property, set the comparison cap to 7.50 percent, matching the cap the $480,000 price already implies. Value at that same 7.50 percent: $36000 / 0.075 = 480000$. Gap: 0.

A comparison cap equal to the property's own cap is a restatement of the asking price, not new information. It is also the check that the arithmetic is wired the right way round. The $600,000 only appears when the comparison cap is a different rate from 7.50 percent.

It is not an appraisal. It is this year's NOI read through a cap you typed. If similar buildings do not trade at 6 percent, the $600,000 is not a market value.

It is not a levered bid. The mortgage sits outside NOI and outside price, so it sits outside $V$. Cash-on-cash return is a different ratio. How leverage ratio works is the borrowed sheet, not this identity.

It is not a Gordon price. Cap rate is silent on growth. How the Gordon growth model works splits a required return into a yield plus $g$. This page is only the yield piece, run backwards.

Which direction is cheap depends entirely on which cap is the comparison. If similar buildings really do trade at 6 percent, a 7.50 percent offer is a lower price for the same $36,000 of income. If they trade at 8 percent, this 7.50 percent offer is a higher price. The calculator will not tell you the market cap. It will tell you what this income is worth at the cap you type.

A yield family name is not a shared sheet. Do not paste this $36,000 of NOI onto a stock's earnings yield.

It is not a market cap screen, not a mortgage engine, and not a growth model. The three sheets are $36,000 of NOI at a 6 percent comparison ($600,000, $120,000 below a $480,000 ask), $50,000 at 7 percent ($714,285.71, $89,285.71 below), and the first property at its own 7.50 percent cap (gap 0). This is educational material, not financial advice.