Approaches to value
Capitalization rate
The rate of return an investor requires, used to convert income into value
Derived from comparable sales rather than invented: the rate at which similar properties in that market have been trading. It expresses risk, so a higher rate means buyers demand more return and therefore pay less for the same income.
How the exam asks about it
Read the relationship as well as the arithmetic. At constant income, a rising cap rate lowers value — which is one of the few genuinely conceptual maths items on the exam.
Related terms
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