Arizona Real Estate License Practice Exam

Question: 1 / 1505

If cap rates in an area are going up, how does this influence value?

Value remains the same

Value goes up

Value goes down

When capitalization rates, or cap rates, increase in an area, it typically indicates that properties in that market are perceived as less valuable by investors for a variety of reasons, such as increased risk or declining income potential from those properties. Since cap rates are calculated as the ratio of a property's net operating income (NOI) to its current market value, a higher cap rate suggests that either the NOI is decreasing, or investors are demanding a higher return for their investment.

As the cap rate rises, the same level of income will now support a lower valuation of the property. This inverse relationship between cap rates and property values means that if cap rates go up, property values tend to go down. Therefore, an increase in cap rates typically reflects a decrease in the market value of properties in that area, signaling potential caution for investors.

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Value goes up by a multiple of the cap rate

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