Question 1

What is a cap rate?

Accepted Answer

Capitalization rate (cap rate) = Net Operating Income ÷ Property Value. It's the most common metric for comparing real estate investments — think of it as the property's yield if purchased with cash. A 6% cap rate means the property generates 6 cents of NOI for every dollar of value. Higher cap rates generally imply higher yields but also higher risk (less desirable markets or asset quality).

Question 2

What cap rates should I expect by market and asset type?

Accepted Answer

Cap rates vary significantly. Class A multifamily in major coastal markets: 3.5-5%. Class B multifamily in secondary markets: 5-7%. Industrial: 4-6% in prime locations. Retail strip centers: 6-9%. Office: highly variable post-pandemic. Generally, the more desirable the market and asset, the lower the cap rate — you're paying more for lower risk and better appreciation prospects.

Question 3

How do I use a cap rate comparison chart in a deal memo?

Accepted Answer

Show your target acquisition cap rate alongside: (1) comparable sales cap rates in the submarket, (2) the market average cap rate for the asset type, and (3) your target exit cap rate. If you're buying at a higher cap rate than comps, it signals value-add opportunity or market mispricing. If buying at a lower cap rate, you need to explain what appreciation or value creation justifies the premium.

Question 4

How do cap rates relate to interest rates?

Accepted Answer

Cap rates and interest rates tend to move together over time — when interest rates rise, cap rates typically expand (prices fall) because the yield spread between real estate and risk-free alternatives (like Treasuries) needs to remain attractive. This is why rising rate environments put downward pressure on property values. The spread between cap rates and the 10-year Treasury is a key metric for institutional investors.

Question 5

Why present cap rates to LPs in a chart rather than a table?

Accepted Answer

A horizontal bar chart lets LPs instantly see how your deal compares to benchmarks — which deal has the highest yield, which markets offer the best spread, and how your portfolio's cap rates have changed over time. Tables require cognitive effort to rank and compare; a sorted bar chart makes the ranking immediate. For LP presentations, visual clarity that reduces cognitive load is always preferable.

Cap Rate Comparison Chart

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FAQ: Cap Rate Comparison Chart