Cap Rate Compression and Expansion: How a Moving Cap Rate Changes an Apartment's Value
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Cap rate compression is a fall in the cap rates buyers accept, which raises the value of the same net operating income. Cap rate expansion is a rise, which lowers it. Because value = NOI ÷ cap rate, a building earning $700,000 is worth about $11.67 million at a 6.0% cap rate, about $10.77 million at 6.5% and $10.0 million at 7.0%. With a loan on the building, the swing in the investors' equity is several times larger than the swing in the price, which is why the exit cap rate is one of the most important assumptions in any apartment projection.
This post is part of our guide to real estate syndication. It shows the math on one building, then what to look for in a projection. Figures are as of November 2026 and the example is illustrative.
How much does a cap rate move change value?
The building earns $700,000 of NOI. The figures are an example.
| Cap rate | Value | Change from 6.0% |
|---|---|---|
| 5.5% | $12,727,273 | +9.1% |
| 6.0% | $11,666,667 | none |
| 6.5% | $10,769,231 | −7.7% |
| 7.0% | $10,000,000 | −14.3% |
Value is not linear in the cap rate: a fall raises value more than a rise of the same size lowers it. For how the cap rate itself is calculated, see underwriting basics.
What does it do to investors' equity?
Now add a loan and a business plan. The building is bought for $11,666,667 (a 6.0% cap rate) with a $7,500,000 interest-only loan, so the equity is about $4,166,667 (closing costs left out for simplicity). Over the hold, the sponsor raises NOI from $700,000 to $800,000, a 14% increase. At sale, the loan is repaid from the price.
| Exit cap rate | Sale price | Equity after repaying the loan | Change in equity |
|---|---|---|---|
| 5.5% (compression) | $14,545,455 | $7,045,455 | +69% |
| 6.0% (unchanged) | $13,333,333 | $5,833,333 | +40% |
| 6.5% (expansion) | $12,307,692 | $4,807,692 | +15% |
| 7.0% (expansion) | $11,428,571 | $3,928,571 | −6% |
The same 14% NOI increase produces anything from a 69% gain to a 6% loss in equity before cash flow and costs, depending only on the exit cap rate. Selling costs, which this table leaves out, make each row lower. That is the core risk of a value-add plan: the sponsor controls the NOI more than the cap rate.
What makes cap rates compress or expand?
- Interest rates. When borrowing costs rise, buyers usually need higher cap rates to make deals work; see cap rates and the 10 year Treasury.
- Investor demand. More money chasing apartments pushes cap rates down; less pushes them up.
- Expected growth. Buyers accept lower cap rates where they expect rents to grow.
- The building itself. An older building at sale than at purchase usually trades at a higher cap rate, all else equal.
Apartment cap rates fell for most of the decade before 2022 and then rose as interest rates went up. Many deals bought at low cap rates in 2021 and 2022 were hurt by that expansion. Nobody can predict the next move.
What should an investor look for in the projection?
- The going-in and exit cap rates side by side. An exit cap rate below the going-in cap rate assumes compression.
- How much higher the exit is. Many projections add a margin for the building's extra age at sale; ask why the sponsor chose theirs. See the exit cap rate assumption.
- A sensitivity table. Returns at the exit cap rate plus 0.5 and plus 1.0 points. See sensitivity analysis.
- How much of the return comes from the sale. The more the projection depends on the sale price, the more the cap rate matters. See equity multiple, IRR and cash-on-cash.
- A plan if the exit cap rate is wrong. Can the deal hold longer, refinance, or keep paying distributions while it waits?
Projections are estimates, not promises, and every investment can lose money.
How DoorRaise fits in
DoorRaise helps sponsors raise equity for apartment buildings with 5 or more units from their friends and followers. The deal page shows projected returns that DoorRaise computes from the sponsor's inputs, including the exit cap rate, after DoorRaise's fees. DoorRaise forms the deal's LLC, prepares the offering documents, files Form D and verifies every investor's accreditation, in 506(b) and 506(c) deals, before they can sign or wire. Investors fund by wire into escrow at Enterprise Bank & Trust, and distributions are quarterly by default. DoorRaise charges two flat fees: $1,500 to set up (non-refundable) and $5,000 a year for administration, the first year paid at closing from the money raised and only if the deal closes.
Before you invest, use the free list of questions to ask a sponsor.
FAQ
What is cap rate compression?
A fall in the cap rates buyers accept for similar buildings. The same NOI is then worth more, so values rise.
What is cap rate expansion?
A rise in cap rates. The same NOI is worth less, so values fall, even if income has not changed.
How does cap rate expansion affect a syndication?
It lowers the sale price. Because the loan is repaid first, the investors' equity falls by a larger percentage than the price.
Should a projection assume cap rate compression?
A conservative projection does not. It assumes an exit cap rate at or above the going-in cap rate and shows returns if it is higher.
Do interest rates affect cap rates?
They tend to move together over time, because buyers compare the building's yield with the cost of borrowing and with other investments. The relationship is not exact.
Sources
- Federal Reserve Bank of New York, Secured Overnight Financing Rate data
- SEC, Investor.gov: investor bulletin on private placements under Regulation D
This article is general information, not legal, tax or investment advice. The example building, loan and returns are illustrative and not a projection for any deal. DoorRaise is not a lender, law firm, broker-dealer, investment adviser or funding portal.