How Cap Rates and Interest Rates Influence Investors’ Acquisitions Decisions

Cap rates, or capitalization rates, refer to the rate of return that an investor can expect to receive on a real estate investment. They are calculated by dividing the net operating income of a property by the property's purchase price or current market value. A lower cap rate indicates that a property is generating less income relative to its value, while a higher cap rate suggests a higher level of income relative to the property's value.

Interest rates, on the other hand, refer to the cost of borrowing money. When interest rates are high, it can be more expensive for investors to borrow money to finance their investments. This can make it more challenging to generate a positive return on investment, as the cost of borrowing may eat into the profits earned from the investment.

Both cap rates and interest rates can impact investment decisions in a number of ways. For example, if an investor is considering purchasing a rental property, they may be more likely to choose a property with a higher cap rate, as this would indicate a higher level of income relative to the property's value. Similarly, if an investor is considering using borrowed money to finance an investment, they may be more likely to proceed if interest rates are low, as this would mean that the cost of borrowing is lower.

On the other hand, if an investor is considering selling a property, a lower cap rate may be more appealing, as this would indicate that the property is generating less income relative to its value and could potentially be sold for a higher price. Similarly, if an investor is considering lending money to another party, a higher interest rate may be more appealing, as it would mean that the investor is earning a higher return on their money.

Overall, cap rates and interest rates can have a significant impact on investment decisions, as they can affect the profitability and risk of an investment. As such, it is important for investors to carefully consider both cap rates and interest rates when making investment decisions.

Be sure to listen to The Capital Stack podcast for more on this topic!

Check out Episode 54 with James Wilson from Old Capital Lending to find out more about how the capital markets influences acquisitions decisions.