CAP RATES
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Using NOI multiples instead of cap rates can indeed feel more intuitive for some, as it aligns with the way EBITDA multiples are used in corporate finance. However, cap rates are essentially the inverse of NOI multiples, so the two approaches are mathematically equivalent. Here's the breakdown:
The choice between the two often comes down to industry norms and personal preference. In real estate, cap rates are more commonly used because they directly reflect the relationship between income and value, while also incorporating market-specific risk and return expectations. Additionally, cap rates are widely understood and standardized in the real estate industry, making them a universal language for valuation.
That said, if you're more comfortable with NOI multiples and can communicate effectively with your team or stakeholders, there's no harm in using them. Just remember to ensure consistency and clarity when discussing valuations.
Sources: Real Estate Private Equity Technical Qs, CAP RATE Interview, Looking for Multifamily model with Loan Sizing Constraints, "Pre-Stabilized" Investments - Multifamily, Real Estate Development Modeling
A cap rate is the inverse of a multiple. So you are using a multiple when you use a cap rate - you’re just expressing it differently.
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So represent it as a multiple for yourself. And when you present internally and externally convert it to cap rates.
Depends on how you think of RE - cap rates are like quoting yields and nobody says AAPL's 5y bonds are trading at a 24x. RE does have an income/yield component and historically that's what institutional core RE has traded on/been used for in portfolios. Widening out to other stuff like hotels, value-add, etc I can see the argument for multiples making more sense, especially as that's where the juicy returns and fees have been in decade of a cap rate compression/multiple expansion regime.
You don’t talk about cap rates as multiples because a cap rate is describing an unlevered yield. For example, a 10M property with a 500k noi is producing a 5% unlevered yield the same way a bond might produce a 5% yield. I would argue that it is counterintuitive to communicate this as a 20x multiple rather than a 5% yield. It sure would make the math easier to do in you head that’s for sure.
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Well based on this and your original post you clearly don’t know how anyone in the industry looks at or refers to things
I guess I’m still not following. All 3 are yield metrics. YoC and a cap rate are property level yield metrics. CoC is a look at how the equity in a deal is performing. None of the above should be spoken about as multiples.
nice post like it
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