Why a High Cap Rate Means Higher Risk
The capitalization rate, or cap rate, represents the rate of return on an income-producing property when applied against the purchase price. One could say, therefore, a high cap rate is a “good” thing. If so, then why does a high cap rate mean a higher risk investment? The cap rate is calculated by dividing the net operating income by the purchase price. In calculating the net, certain expenses personal to the particular owner or prospective buyer, such as debt service, ar