Cap rates are an essential tool in several areas of real estate investment:
- Property Valuation: They offer a quick way to compare properties based on their income-generating potential.
- Investment Recovery: A higher cap rate often indicates a faster payback period, helping you estimate how long it will take to recoup your initial investment.
However, cap rates have limitations, such as not accounting for financing costs, capital improvements, or vacancy rates. They should be one part of a broader investment analysis.