What relationship does the cap rate have with the property value?

The cap rate, short for capitalization rate, is a vital metric in real estate that reflects the rate of return on an investment property based on the income the property generates. When property values increase, it's often because investors are willing to pay more for future potential earnings or existing cash flow. However, the cap rate is calculated by taking the annual net operating income (NOI) and dividing it by the property value.

In this context, if the cap rate decreases, it means that the property is perceived as a safer or more desirable investment, leading to a situation where buyers are willing to pay more for it. Therefore, as the cap rate decreases, the value of the property typically increases because investors are compromising on the return (represented by a lower cap rate) in favor of a more stable or desirable asset.

Thus, the relationship established is that a declining cap rate generally corresponds with rising property values, affirming that as the cap rate decreases, the property value tends to increase. This understanding is crucial for investors to evaluate how changes in perceived risk or income expectations impact the value of real estate investments.