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The Capitalization Rate (Cap Rate) is a real estate valuation metric used to estimate the potential rate of return on an investment property, calculated by dividing its Net Operating Income (NOI) by its current market value.
Cap rate compression occurs when the capitalization rate for investment properties decreases, indicating that property values are rising faster than their net operating income (NOI), often driven by increased demand or lower interest rates.
The Terminal Cap Rate is the estimated capitalization rate used to project a property's sale price (reversionary value) at the end of a future holding period, a critical input in Discounted Cash Flow (DCF) valuation.
Performance measurement in real estate investing involves tracking and analyzing key financial metrics to evaluate how well an investment is performing against its goals and market benchmarks. It helps investors make informed decisions and optimize their strategies.
Financial ratios are quantitative tools used by real estate investors to assess a property's profitability, liquidity, solvency, and operational efficiency, aiding in informed investment decisions and comparative analysis.
Profitability analysis is the process of evaluating a real estate investment's potential to generate financial returns, assessing its viability and attractiveness relative to costs and risks.