The cap rate comes up a few times within our analysis. To start we can determine our "going in" cap rate by taking the NOI (Net Operating Income) and dividing by the purchase price of the property. Ex. 100,000 NOI / 2,000,000 purchase price = .05 or a 5 cap. We underwrite the market going in cap rate as a basis for projecting future cap rates such as the one at year 1-3 when we refinance and years 5-10 when we sell. We add 10 - 15 basis points annually in our projections to create a conservative picture of outcomes. By adding 10 - 15 basis points we are essentially betting against the market and saying the properties cash flows will be worth less every year. Market and property specific factors determine a fair market cap rate for different asset classes within locations.