Broker Cap Rate vs. True Cap Rate: What Sellers Don't Show You

Every offering memorandum leads with a cap rate. It is almost always the broker cap rate — and it is almost always the most flattering number that can be defended. Knowing how it's built, and how to rebuild it honestly, is the difference between paying for income you'll keep and paying for income that exists only on the seller's spreadsheet.

What the broker cap rate is

The broker cap rate = the offering-memo NOI ÷ the asking price. The arithmetic is fine; the inputs are the problem. Brokers construct the NOI to be as high as can be justified, typically by:

• presenting NOI before replacement reserves,
• excluding or understating real landlord expenses (management, the landlord's own insurance, financing/bank fees, non-reimbursed costs),
• assuming optimistic vacancy or above-market / mark-to-market rent as if it were already in place.

Each choice raises NOI, which raises the cap rate, which makes the price look cheaper. None of them are necessarily dishonest in isolation — but stacked together they describe a deal you can't actually buy at that yield.

What the true cap rate is

The true cap rate = NOI rebuilt on real economics ÷ the same asking price. You keep the price fixed and fix the NOI:

• Real landlord expenses — what the owner actually pays, not a stylized expense ratio. (See NOI.)
• Replacement reserves — the capital you must set aside for roofs, surfacing, systems, and turnover. Pre-reserves NOI flatters everything downstream. (See operating reserves.)
• Realistic vacancy and credit loss — what the rent roll will actually do, including rollover and downtime.

The result is lower NOI, and therefore a lower — and honest — cap rate. That is the yield you actually go in at.

Why the spread matters

The gap between the broker cap and the true cap is where the price gets justified. A simple way to see it: hold your target going-in yield fixed and ask what each NOI implies for price.

• Suppose the broker shows $300,000 NOI at a $5,000,000 ask — a 6.0% broker cap.
• Rebuild NOI honestly to $270,000 (real expenses + reserves + realistic vacancy) and at the same price the true cap is 5.4%.
• If your target going-in yield is 6.0%, the price that actually delivers it is $270,000 ÷ 6.0% = $4,500,000 — a $500,000 gap created entirely by how NOI was presented.

That $500,000 is the negotiation. Underwrite from the true cap; quote the broker cap only to know the seller's framing. When a seller defends the ask with the broker number, you counter with the rebuilt NOI and the price it supports.

How to compute each

1. Take the asking price and the OM NOI exactly as presented; compute the broker cap = NOI ÷ price.
2. Rebuild NOI on real economics — actual landlord expenses, replacement reserves, realistic vacancy/credit loss. For NNN deals, confirm which expenses the tenant truly reimburses versus what the landlord actually carries (see the NNN lease treatment).
3. Compute the true cap = rebuilt NOI ÷ the same price.
4. Measure the spread, translate it into the price that hits your target yield, and negotiate from there.

UpsideIQ shows both numbers side by side on every deal so you never have to take the headline at face value — try the cap-rate calculator with its broker-vs-true toggle, and read the deeper IOS treatment in How to Underwrite an IOS Deal.

Stop underwriting to the seller's number. Set your criteria once and UpsideIQ grades every deal on the true cap — broker basis and true basis shown side by side, reserves and real expenses done right.