What is a cap rate?

A lower cap rate means a higher price for the same income. Cap rates tend to rise when interest rates rise, and they differ by property type, location and quality. Buyers often compare the rate on the income a building earns today with the rate on the income they expect after improving it.

Say a building earns $5 million a year. At a 5% cap rate it is worth $100 million; at 6% it is worth about $83 million.

Small moves in cap rates change values a lot, so a building can lose value while its income stays the same.

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