Wut? Are you ready for this discussion? I am! Cap rates are NOT a "return" metric.
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[{"id": "hkj8y7c", "text": "So easy question, If I pay $1,000,000 for $100,000 NOI am I getting a 10% return?", "replies": [{"id": "hkjbvea", "text": "One of the flaws of cap rates is that they assume perpetuity. But using them for their purpose, in your example,  then yes, you are making a 10% return on your investment. \n\nA cap rate only shows your return on investment, but does not account for your return of investment. Since the assume a certain  cash flow in perpetuity, they can be misleading when strong appreciation or depreciation are anticipated in the future.", "replies": [{"id": "hkjffl2", "text": "WOW!  I paid $10 for each dollar of NOI.  Later I found out that it was a 15% cap rate market and I should have only paid a lot less. V=I/R. DUDE,  what happened to my \"return\"?  LOL", "replies": [], "depth": 3}, {"id": "hkji45i", "text": "You stated,**One of the flaws of cap rates is that they assume perpetuity.**\n\n&amp;#x200B;\n\nYeah NO!  cap rate only looks at what investors are paying for NOI today!  Geez  Sales comparison ONLY tells you what investors are paying for sf TODAY!    There is no PERPETUITY!  How can you not understand this?", "replies": [], "depth": 3}, {"id": "hkjieyc", "text": "Where is my 10% \"return\"?", "replies": [{"id": "hkjjm8d", "text": "A million divided by $100k is 10% return for Year 1. I'm not sure what else you are trying to get at here. I partly agreed with you and you still want to tell me I'm wrong. \n\nAny return metric has different strengths and weakness. A cap rate can tell you your \"return ON investmen\" for year 1. It's not an all encompassing metrics to determine value for a non level income stream. And it does not tell you your \"return OF investment\"", "replies": [{"id": "hkjkdqb", "text": "So what happens to my \"return\"  if I pay $1,000,000 in a 15% cap rate market?", "replies": [{"id": "hkjl2sf", "text": "You still are getting $100,000 NOI. So you are getting 10% on what you paid. If you'd paid $666,666, then that same $100,000 would be 15% on your money.", "replies": [{"id": "hkjp70l", "text": "Am i?", "replies": [], "depth": 7}], "depth": 6}], "depth": 5}], "depth": 4}], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "hkj9xtx", "text": "As an investor I do not calculate cap rates!  I do not have access to the participants of the market.  I have to rely on third party professionals.  \n\nAs a professional third party I derived cap rates because I had legal authority to compel buyers to provide documentation.  My derived cap rates were/are used to determine market value.", "replies": [{"id": "hkjjza0", "text": "Legal authority? Are you the bogeyman that nails people on tax reassessment?", "replies": [{"id": "hkjkog9", "text": "FN..A!", "replies": [{"id": "hkjm5uz", "text": "I always wondered why it was so easy to win an appeal. Cool.", "replies": [{"id": "hkjmsk2", "text": "Not in my jurisdiction!  So show me how a cap rate measures a \"return\" if you can.", "replies": [{"id": "hkjn04q", "text": "I told you I use divination. Examining sheep entrails mostly. Sometimes casting chicken bones.", "replies": [{"id": "hkjow4s", "text": "sure, clueless", "replies": [], "depth": 7}], "depth": 6}], "depth": 5}], "depth": 4}], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "hkja82g", "text": "Cap rates is not a return metric. Cap rate is the multiple you pay for a property and used to compare against similar properties. If you are looking for a return metric I would use cash on cash and IRR.", "replies": [{"id": "hkjaleh", "text": "Exactly!!!  Cap rates will lead you to the probable market value AND THEN you need to determine the returns.", "replies": [{"id": "hkjcbgx", "text": "Not exactly. The cap rate tells you how much of a multiple you are paying on current earnings based on the sale price. If you decide that price is fair then the value is determined, but if another buyer is willing to pay more or less that is the value and the cap rate is just what is paid on current earnings.", "replies": [], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "hkjcscw", "text": "I calculate cap rates by looking at sheep entrails over the light of a fire in the third night of the waning gibbous moon just when Venus crosses the horizon. This divination method is accurate all of the time some of the time.", "replies": [{"id": "hkjh84x", "text": "Of course you do!", "replies": [{"id": "hkjig3j", "text": "It\u2019s as accurate as any other method given that people use 999999 different methods to calculate cap rates. People will use an income number that best suits the story they want to tell - t12, t3, in place, adjusted in place, pro forma, tax adjusted proforma - you name it someone will adjust income to suit their needs. The formula is the same the only variable people mess with is how they look at income.", "replies": [{"id": "hkjormx", "text": "umm, sure.  you are so clueless and will NOT accept my challenge to a discussion      ........................................................................................................", "replies": [], "depth": 4}], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "hkjgdjj", "text": "Cap rates are instrumental in IRR", "replies": [], "depth": 1}]