A lower caprate often means higher appreciation potential, and safer investments. However, a lower cap rate can indicate greater appreciation potential and less risk.
These are only two aspects that contribute to the calculation of the cap rates. The cap rate should not only be determined by income, but also price.
Be aware that assets with a steady monthly cash flow don't appreciate as much over time. A high capitalization ratio for the area often produces large cash flows each month but does not appreciate in value over time.
On the other hand, a low monthly cash flow is not possible with a low capitalization. However, they will appreciate over time.
Also, you should consider your investment goals. Understanding your investment goals and criteria will help determine what deals you are looking to get and how you can utilize the capitalization rate for the right deal for your investors.
Be aware of not just the caprate, but also hold times, appreciation, and cashflow. These are all valid criteria that you should consider as an investor. You'll be better able to understand the types of capitalization rates you desire and need once you have this information.
The capitalization percentage is a measure that shows investors how long they will have to get their money back. Divide the NOI (purchase price) by the property's cap to calculate it.
