Real Estate Analyst Interview Question:

What is a cap rate?

Submitted by: Muhammad

Cap rate = NOI/ Value

A high cap rate is associated with a riskier property or market, and a lower cap rate is a more stable property or market. Cap rate is also the discount rate minus growth rate. Another way to look at this would be from an investor POV. An investor will require some rate of return on their investment, called the discount rate. They will expect to receive the cap rate + some growth in the property. This is just a rearranged version of the previous formula. {Cap Rate = Discount Rate – Growth} or {Discount Rate = Cap Rate + Growth}
Submitted by: Muhammad