Buyers quote cap rate. Operators live in NOI. Same South Coast building — Fall River triple-decker stock, New Bedford mill conversions, Bristol County six-families — two languages. If you mix them up, you overpay at list, underwrite fiction, or “win” a deal your lender will not fund.
This guide defines both terms the way investors and answer engines look them up, then walks a realistic Fall River–style six-family through Fortified’s free Buy & Hold Analyzer so you can see how NOI and cap rate move together when price moves.
What is NOI (net operating income)?
NOI is the property’s income after vacancy and operating expenses, before any mortgage payment. Build it from believable rents, a real vacancy haircut, and full operating costs — taxes, insurance, management, reserves, and owner-paid ops. Cap rate, DSCR, and cash flow all hang off NOI. If NOI is inflated, every return metric under it is inflated.
On Fortified’s sample six-family stack (six × $1,500, 10% vacancy, 10% management, full taxes/insurance/ops), yearly NOI lands near $57,460 in the live Buy & Hold Analyzer. That number is the spine — not a suggestion.
What is cap rate?
Cap rate is yearly NOI divided by purchase price. It is an unlevered yield on price before financing. At a fixed NOI, a lower offer price means a higher cap rate. Cap rate ignores your down payment, rate, and term — so it is a pricing language, not “money in your pocket.”
On the same sample at a $725,000 ask, the analyzer prints about a 7.93% cap ($57,460 ÷ $725,000). Change the price; the cap moves. Change the NOI; the cap and the justified price both move.
Cap rate vs NOI — who does what
| Question | NOI | Cap rate |
|---|---|---|
| What is it? | Income after vacancy and opex, before debt | Yearly NOI ÷ purchase price |
| Includes mortgage? | No | No (unlevered) |
| Main job | Truth about the building’s operations | Price the income stream |
| Moves when… | Rents, vacancy, or expenses change | NOI or price changes |
| Does not replace… | DSCR, cash-on-cash, CapEx reality | Loan underwriting or cash flow |
Use both. NOI first. Cap rate second. Debt metrics third.
Why small NOI moves change price
Hold the cap rate fixed and back into price: Price ≈ NOI ÷ cap rate. At a 7.93% cap, roughly $12,600 of price rides on each $1,000 of yearly NOI. A lazy insurance line, a “0% vacancy” fantasy, or a deleted management fee is not a rounding error — it is offer math.
Flip it: hold NOI fixed and ask what price a 7% vs 8% cap implies on about $57,460 NOI — about $821,000 vs $718,000. That gap is the negotiation, not the porch photo.
How to use this when you write an offer
- Build honest NOI in the Buy & Hold Analyzer (vacancy and management included).
- Read cap rate at list price — is the ask in the same world as the income?
- Open Buying Range and mark the price band where cap rate, DSCR, and cash-on-cash meet your rules.
- Write the offer from that band — or walk. Sometimes the best deal is the one you don’t buy.
- Stress taxes and insurance the way South Coast files actually reassess — Fall River / Bristol County bills move; “seller’s last year” is not your year-two NOI.
For the full six-family walkthrough, see How to Underwrite a Multi-Family in Fall River. For lender coverage, see What Is DSCR.
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Questions on a live South Coast file: (508) 671-7228.
Definitions and valuation FAQs
These are the questions investors ask when valuing a rental building and deciding what to offer.
What is the difference between cap rate and NOI?
NOI is a dollar amount: income after vacancy and operating expenses, before debt. Cap rate is a percentage: yearly NOI divided by purchase price. NOI describes the building’s operations. Cap rate prices that income. You need both — NOI without a price is incomplete, and a cap rate without honest NOI is marketing.
How do I calculate cap rate on a Fall River multi-family?
Divide yearly NOI by the purchase price (or serious offer price). Example: about $57,460 NOI on a $725,000 ask is roughly a 7.93% cap. Use the same NOI definition every time so comps and offers are comparable. Fortified’s free Buy & Hold Analyzer computes cap rate live as you change price and expenses.
What is a good cap rate for South Coast MA rentals?
There is no single “good” number. Cap rate depends on condition, tenancy, CapEx, and risk. Use it to test whether list price fits the income and nearby comps, then still run DSCR and cash-on-cash with your real loan. A high cap on fake NOI is not a bargain.
Does cap rate include the mortgage?
No. Cap rate is unlevered — before financing. Two buyers can see the same cap rate and very different cash-on-cash returns if down payments or rates differ. After cap rate, layer debt service and DSCR.
How does NOI affect what I should offer?
At a target cap rate, higher NOI supports a higher price; lower NOI demands a lower price. Formula shorthand: Price ≈ NOI ÷ target cap rate. Stress NOI with real vacancy, insurance, taxes, and management before you fall in love with list.
Educational example only. Not tax, legal, appraisal, or lending advice. Verify every assumption on your own file.