Why are Cap Rates Important?

Cap rates provide investors with two key insights:

1. Return on Investment: It gives you an idea of the property’s income potential, irrespective of how the property is financed (e.g., without considering mortgages or taxes).
2. Risk Assessment: A higher cap rate typically signals higher risk with the possibility of higher returns, while a lower cap rate suggests less risk but smaller returns. This trade-off helps you evaluate the risk-return profile of a property.