Question of the day
2026-09-07
Why does a LOWER cap rate mean a HIGHER property value?
Answer it out loud first — like you would in the room. Then check yourself:
Reveal the model answer
Model answer
Because value = NOI / cap rate, the cap rate sits in the denominator: the same $5 million of NOI is worth $5M / 0.05 = $100 million at a 5% cap but $5M / 0.04 = $125 million at a 4% cap. A low cap rate means investors accept a lower current yield, which they only do for assets with lower risk or better growth prospects - so they pay more per dollar of today's NOI. It is exactly the same logic as a high P/E: low yield equals high multiple.
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