Understanding Cap Rates In Down Market
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Understanding Cap Rates In Down Market
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About this listen
Cap rates (property's annual net income divided by purchase price) as a key real estate metric. They cover compression (falling rates, rising prices) and expansion (rising rates, falling prices), showing how small cap rate changes significantly impact property values. They note cap rates typically increase during recessions due to higher perceived risk, financing costs, and lower growth expectations.
- Cap Rate Math Impact: A 2.5% cap rate increase (4% to 6.5%) can cause a 38.5% property value drop, potentially eliminating equity for leveraged investors.
- Recession Patterns: Cap rates rise during downturns as investors require higher returns for increased risk, even when interest rates initially fall.
- Investor Strategy: Savvy investors avoid assuming further cap rate compression and instead stress-test for expansion to ensure investments can withstand market changes.
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