When using cap rates, what is the difference between going-in cap rate and stabilized cap rate?

• A. Going-in cap rate uses stabilized NOI; stabilized cap rate uses current NOI
• B. Going-in cap rate is used only for purchasers with financing; stabilized cap rate is for cash buyers
• C. Going-in cap rate is based on current NOI and market rents; stabilized cap rate is based on stabilized NOI and market rents
• D. There is no difference; they are interchangeable

Answer: (D)

The main idea tested is that cap rates can be anchored to different snapshots of a property's income and value. Going-in cap rate uses what the property is currently producing (current NOI) relative to the price you’re paying. Stabilized cap rate uses the income once the property is operating at its long-run, stable level (stabilized NOI) relative to the expected long-run value (stabilized value).

This matters because occupancy, rents, and expenses typically move as a property improves or as markets tighten. If you buy now with a lower occupancy and lower rents, the going-in cap rate reflects that near-term performance. After stabilization—when occupancy and rents have settled—the stabilized cap rate reflects the longer-term, normalized performance and value. So they are not interchangeable; they answer different questions: “What yield do I get right now?” versus “What yield will the asset produce at full, stabilized operation and value?”