How cap rate is calculated, what it signals about risk, and how it interacts with financed cash-on-cash return.
Cap rate equals in-place net operating income (NOI) divided by purchase price. It is an unlevered yield used to compare properties on a like-for-like basis.
Higher cap rates generally reflect higher perceived risk or lower growth expectations; lower cap rates typically reflect stronger locations, credit tenants, or growth. Cap rate alone does not capture lease term, tenant credit, or capex exposure.
Financed buyers also model cash-on-cash return, which factors debt service. Small changes in rate, amortization, or LTV can materially change cash-on-cash even at a fixed cap rate.
Educational content only. Not tax, legal, or investment advice. Consult qualified professionals for your specific situation.
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