Cap rate is calculated by dividing a property's net operating income by its purchase price: cap rate = NOI ÷ price. A building generating $550,000 of NOI purchased for $10,000,000 has a 5.5% cap rate. That one formula anchors commercial real estate analysis, but no serious NYC investor stops there — cash-on-cash return measures your levered yield, DSCR measures whether the debt actually works, GRM gives a fast screening ratio, and IRR captures the full multi-year picture including sale proceeds. This guide gives you every formula, a worked NYC example with realistic numbers, and the order in which professionals actually run the math.
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 unlevered annual yield would the current operations pay you? Because it strips out financing, it is the cleanest way to compare properties against each other and against where the market is pricing risk. Manhattan cap rates in 2026 range roughly from 3.75–4.75% on prime retail to 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.
The formula inverts into 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 discipline, and tax appeals move NYC building values so violently, and why cap-rate compression or expansion of even 50 basis points swings values 8–10%. For the full conceptual 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 — but exclude debt service, income taxes, depreciation, and capital expenditures. Those exclusions are where sellers cheat: an offering memorandum that omits a realistic management fee (3–4% of collections) or understates NYC real estate taxes after the post-sale reassessment inflates NOI and therefore price.
Always rebuild NOI from source documents — rent roll, leases, tax bills, and utility history — rather than accepting the broker pro forma. In NYC the tax line deserves special paranoia: assessments frequently reset after a sale, and the difference between the seller’s tax bill and yours can erase 50+ basis points of yield. Run your own numbers through the NOI calculator before you ever quote a cap rate.
How to run the full analysis, step by step
Here is the sequence professionals actually follow when a deal hits the desk:
- 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).
- 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.
- Divide NOI by asking price to get the cap rate — then compare it against submarket comps for the same asset class and regulation profile to judge whether the pricing is rich or cheap.
- 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, resize the loan downward until it clears.
- Compute cash-on-cash — subtract annual debt service from NOI, then divide by total cash in (down payment plus closing costs of roughly 3–5% in NYC plus immediate capex).
- Project the hold and estimate IRR — model rent growth, expense growth, capex, 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 decisions are actually made.
Notice the order: income first, price second, debt third. Investors who start with the financing and back into the value get the answer the lender's spreadsheet wants, not the answer 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 effective gross income. Operating expenses: $180,000 real estate taxes, $38,000 insurance, $52,000 utilities and maintenance, $31,500 management (4%) — total $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 per year — 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.
That 2.3% cash-on-cash against a 4.86% cap rate is negative leverage — borrowing at a rate above the property's unlevered yield — and it is the current reality across much of Manhattan. The deal only works if the growth story (rent upside, tax certiorari, refinance at lower rates, or exit cap compression) carries the IRR. That is not a reason to walk; it is the reason IRR, not going-in yield, decides institutional deals in 2026.
GRM, IRR, and when each metric earns its place
Gross rent multiplier = price ÷ gross annual rent. It ignores expenses entirely, which makes it useless for decisions but useful for screening: Manhattan free-market multifamily commonly screens at 11–14x GRM, and a listing at 18x flags itself before you waste an afternoon on it. Cash-on-cash and DSCR are the levered lenses — one for your equity, one for your lender — and DSCR is increasingly the binding constraint that sizes NYC loans, not LTV.
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. Conceptually: it is the annualized return on every dollar for exactly the time it was invested. IRR is the only metric that captures timing, which is why value-add and conversion deals with back-loaded profits are underwritten on IRR, not cap rate. A conversion buyer underwriting a vacant office purchase — the logic behind Skyline’s $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
Three NYC-specific 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 legally capped, so identical going-in yields imply radically different IRRs. Second, taxes: NYC reassessment risk means the seller’s NOI is not your NOI; underwrite the tax line forward. Third, specialty assets break cap-rate logic entirely — ground-lease fee positions like Skyline’s $65M, 99-year ground lease at 236 Fifth Avenue trade at 3–5% yields on ground rent because they are duration plays priced like 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.
The lesson: cap rate is a language, not a verdict. It tells you what the market is paying for a dollar of income in that submarket and asset class — whether that dollar of income can grow, and at what risk, is the actual analysis. Our guide to valuing commercial property covers the income, sales-comparison, and cost approaches that professionals triangulate.
How Skyline approaches underwriting and pricing
Every Skyline pricing opinion is built the way this article describes: NOI rebuilt from source documents, cap rates drawn from real closed comps — including our own off-market investment sales, which never appear in public databases — and a levered sanity check against current debt terms. That is how we defend pricing to institutional buyers on assets 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 returns a defensible range with comp support, no cost and no obligation.
Frequently asked questions
- What is a good cap rate in NYC?
- There is no single good cap rate — only the right cap rate for the asset class and regulation profile. In 2026, prime Manhattan retail trades around 3.75–4.75%, Class A office and free-market multifamily around 4.5–5.5%, rent-stabilized multifamily at 5.5–7%+, and ground-lease fee positions at 3–5% on ground rent. A cap rate meaningfully above the comp range signals risk the market has priced in — regulation, capex, tenancy — not a bargain by default.
- What is the difference between cap rate and cash-on-cash return?
- Cap rate is unlevered: NOI divided by price, as if you paid all cash. Cash-on-cash is levered: annual cash flow after debt service divided by the actual cash you invested. When borrowing costs are below the cap rate, leverage pushes cash-on-cash above the cap rate; when debt costs more than the cap rate — common in Manhattan in 2026 — cash-on-cash falls below it (negative leverage), and the deal must be justified by growth and exit value rather than current yield.
- Does NOI include mortgage payments or capital expenditures?
- No. NOI is effective gross income minus operating expenses only — real estate taxes, insurance, utilities, repairs, payroll, management. Debt service is excluded so buildings can be compared independent of financing; capital expenditures, depreciation, and income taxes are excluded because they are investor- and strategy-specific. Sophisticated buyers still model a capex reserve (often $250–$500 per unit per year on multifamily) right below the NOI line, because a cap rate on NOI that ignores real capital needs overstates the true yield.
- What DSCR do NYC commercial lenders require?
- Most NYC balance-sheet and agency lenders require a minimum debt service coverage ratio of 1.20–1.25x, meaning NOI must exceed annual debt service by 20–25%. At current interest rates, DSCR — not loan-to-value — is usually the binding constraint: a lender advertising 65% LTV will still cut the loan to whatever size clears the coverage floor. Always size the loan from DSCR first, then check whether the implied LTV meets your equity plan.