Discuss the relationship between the capitalisation rates for the valuation of income producing properties and

In Property Management - Asked by Brian K. - Mar 5, 2014
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Answer(s)

MIKE P.
Broker/Agent
Woodstock, GA

As CAP Rates rise, prices fall. For Business Majors, it's the same formula as Bond Valuation.
For a given property:
$100,000 Cash Flow / 10% CAP Rate = $1,000,000
For the same property:
$100,000 Cash Flow / 12% CAP Rate = $833,333.33
To get Cash Flow:
Revenue - Expenses = Cash Flow
Expenses include all cash charges except interest as CAP rates are based on a cash purchase. Do not include vacancy rate or depreciation.

Mar 10, 2014
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W.C. W.
Owner/Investor
Quakertown, PA

"Higher the cap rate (or return), the lower the valuation."

Mar 19, 2014
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W.C. W.
Owner/Investor
Quakertown, PA

"Higher the cap rate (or return), the lower the valuation."

Mar 19, 2014
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Geoff J.
Broker/Agent
Beverly Hills, CA

For clarification:
Cap Rate= NOI/Price
Gross Rents
Less Vacancy (= Effective Rents)
Less Expenses
= Net Operating Income (not Cash Flow)
NOI Less Debt Service = Cash Flow
On a cash transaction, the NOI and cash flow equal the same total, but the two are not synonymous.

Mar 29, 2014
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Glen W.
Lender/Mortgage Broker
Atlanta, GA

This is a commonly asked question and one many investors get confused on. In a nutshell the cap rate (capitalization rate) works in inverse to the value. A better located property/tenant, etc... demands a much lower cap rate. In essence cap rate is a gauge of risk. The higher the cap rate, the more risk/perceived risk in the property. For example a building leased to Home Depot is a much lower risk (ie lower cap rate) than a building leased to a tattoo artist that recently opened a store with little credit. Hope this helps.

Apr 1, 2014
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Eric S.
Broker/Agent
Brooklyn, NY

Sellers want to dispose of their property at the lowest possible cap rate they can achieve, while buyers want to purchase at as high of a cap rate as possible as it indicates a higher return on their investment.

Apr 29, 2014
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