How to Use Cap Rates and DOM Together

In real estate investing, there’s no shortage of metrics to consider, but two of the most important are the capitalization rate (cap rate) and days on market (DOM). Used individually, each offers valuable insights. They can give you a powerful advantage in identifying profitable investment opportunities and knowing when to strike.

This guide will walk you through what cap rates and DOM mean, how to calculate and interpret them, and how combining them can lead to smarter, better-timed decisions.

What Is a Cap Rate and Why It Matters

The capitalization rate, or cap rate, is a key formula real estate investors use to assess a property’s potential return. It gives you a quick snapshot of how profitable an income-generating property could be, relative to its current market value.

The formula is:

Cap Rate = Net Operating Income (NOI) / Current Market Value

Here, the Net Operating Income (NOI) is the property’s expected annual income after deducting all operating expenses like taxes, insurance, maintenance, and management fees. It does not include mortgage payments. The current market value refers to the property’s present-day appraised or estimated value—not the purchase price, especially in volatile or appreciating markets.

Cap rates are typically expressed as a percentage. For example, if a property generates $50,000 in annual NOI and is worth $1,000,000, the cap rate is 5%.

A cap rate is most useful when comparing multiple similar properties in the same area or asset class. It helps investors estimate how much return a property could generate annually, assuming it’s purchased with cash.

What Does Days on Market (DOM) Mean?

Days on market is the number of days a property has been listed for sale. It can serve as a window into the property’s demand, pricing strategy, and condition.

A property that’s been listed for just a few days likely indicates high demand, especially in competitive markets. In contrast, a home sitting on the market for 60, 90, or even more days may raise questions. It could suggest that the property is overpriced, needs repairs, or simply hasn’t attracted the right buyer yet. For investors, this is an opportunity to negotiate a better deal.

DOM also gives clues about the overall market. If properties in an area are selling quickly, it’s likely a seller’s market. Longer average DOM points toward a buyer’s market, where investors may find more flexibility in negotiations.

The Overlooked Connection Between Cap Rates and Days on Market

While cap rates and DOM measure different things—one focused on income potential, the other on time-on-market—they can be powerful when used together. Many investors overlook this relationship.

A property with a longer DOM may be overpriced, but it might also present an opportunity. If a seller has been unable to move the property, they may be more willing to lower the price. This, in turn, can increase the cap rate. Lower purchase price, with income staying the same, results in a better return on investment.

For example, imagine you find a triplex listed at $675,000 that’s been sitting for 90 days. It produces an NOI of $40,800.

Cap Rate = $40,800 / $675,000 = 6.0%

If you negotiate the price down to $625,000, the cap rate increases:

Cap Rate = $40,800 / $625,000 = 6.5%

That extra half-point in return could make a meaningful difference over time, especially when scaled across a portfolio.

Knowing Market Risk Through Cap Rates and DOM

Cap rates not only measure return—they also help you gauge risk. Generally, a higher cap rate reflects higher risk and potentially greater reward. A lower cap rate usually signals a more stable investment, but with reduced cash flow.

The same principle applies to DOM. A property that lingers on the market may carry some red flags: deferred maintenance, poor location, or inflated asking price. However, it might also just be under-marketed or need minor upgrades—creating an opening for the right buyer to add value.

When cap rates and DOM both trend high, caution is warranted. But when you find a long-listed property in a decent location with solid fundamentals, you may be able to boost returns significantly by negotiating a better deal.

Using DOM as a Filter for Better Cap Rates

As an investor, you can use DOM as an effective filter during your property search. Homes on the market longer than the area average are more likely to have price reductions or motivated sellers. This presents an opportunity to acquire below market value, improving your cap rate and equity position immediately.

By monitoring DOM trends across zip codes or neighborhoods, you can also stay ahead of softening markets where sellers may be more negotiable. When paired with cap rate analysis, this becomes a powerful combination for identifying undervalued assets.

When to Be Cautious

It’s important to understand that not all high cap rate deals are good deals. A property with a 9% cap rate might seem attractive—until you dig deeper and discover high vacancy rates, unreliable tenants, or upcoming major repairs.

Similarly, a property sitting on the market for 120+ days could have a fundamental issue that’s scaring off other investors. That’s why it’s critical to go beyond the numbers. Always inspect the property, review rent rolls, analyze the neighborhood, and account for potential risks before deciding.

Cap rate is only as strong as the accuracy of the income and expense assumptions behind it.

Case Study: A Strategic Use of Cap Rate and DOM

Let’s consider a simple example. You’re looking at a duplex in Greensboro listed for $350,000. The property has been on the market for 75 days, and local comps show similar homes selling in 30-40 days. The rental income is $2,500/month, and the estimated expenses are $800/month.

That gives you an NOI of:

($2,500 – $800) x 12 = $20,400

Using the list price:

Cap Rate = $20,400 / $350,000 = 5.8%

You offer $325,000, citing the long DOM and minor updates needed. The seller accepts.

Cap Rate = $20,400 / $325,000 = 6.3%

Thanks to a long DOM and solid cap rate analysis, you’ve just added 0.5% to your annual return through strategic negotiation.

A Balanced, Data-Driven Approach to Real Estate Investing

Cap rates help you understand the potential return on a property based on income and price, while days on market (DOM) reveals how long a property has been listed—and how motivated the seller might be. When used together, these metrics can uncover profitability and timing opportunities.

But cap rates and DOM shouldn’t be viewed in isolation. For best results, combine them with insights into location, property condition, tenant demand, and long-term market trends. This well-rounded approach leads to more strategic, confident, and ultimately more profitable investments.

Let our experienced investment team at Henderson Properties help you identify the right opportunities in today’s market. Reach out now to speak with an investor-friendly real estate agent!