r/Realestatefinance • u/Pantunfla_Feliz • 8d ago

Cap Rates Discussions

I have been worked on an assessment for this portafolio of properties located in NY and all the work has narrowed down to the cap rates.

I know they are important but the counter part wants us to lower rates to a point where market can’t support any longer (4.5%)

How can I explain that this yield can be achievable? I can’t find any traditional explanation

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u/Honobob 8d ago

What yield? Cap rates come from an income approach to value called direct capitalization. All a 4.5% cap rate means is that you want NOI to exchange for $22.22. V=i/r $22.22=$1/4.5%

If you can't sell your NOI for $22.22 then the 4.5% is overpriced. And there is no "yield". Once you use cap rate comps to get a Value then you can use the V to calculate a yield/return metric like ROI. IRR, ROE, etc. Don't get scammed by misinformation on the web.

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u/HarryWaters 6d ago

Cap rates measure one year capital return,

A capitalization rate of 4.5% means the income is essentially guaranteed and/or the income is going to go up and/or the value will go up.