REIT investors may have seen the term “capitalization rate” used in discussions of individual real estate property acquisitions and valuations and even in the broader market context when comparing investor expectations and property portfolio values. In this article we explain what capitalization rates or “cap rates” are and what they aren’t, and how nontraded REIT investors might interpret them. Investors expect both a return on their investment and a return of their investment. Both types of returns involve risk. Rational investors realize that higher expected returns involve more risk, which may mean less predictable returns or greater chance of loss.
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