What are the advantages and disadvantages of cap rate?

Answer 1

The cap rate, or capitalization rate, is a useful metric for evaluating the potential return on investment in real estate. Its advantages include simplicity and ease of use, allowing investors to quickly assess property value relative to income. However, its disadvantages include that it does not account for future cash flows, financing costs, or market volatility, which may lead to an incomplete picture of an investment's potential. Additionally, cap rates can vary significantly across different markets and property types, making comparisons challenging.