Do you want your ROC to be higher than you initial Cap Rate (Student Question)?
Had this asked in an interview.
1.) Wouldn't you want your ROC to be lower since as potential stabilized NOI grows, your ROC will fall, right?
2.) How do you use ROC in your analysis? Are you trying to look for a spread between these numbers as they represent future growth in potential NOI?
Thanks for all of the help!
Great questions! Let's break it down:
1.) The relationship between Return on Cost (ROC) and Capitalization Rate (Cap Rate) can be a bit tricky. Generally, you'd want your ROC to be higher than your initial Cap Rate. This is because ROC is essentially your yield on cost - it's the net operating income (NOI) you expect to achieve on the total cost of the project. If your ROC is higher than your Cap Rate, it means you're achieving a higher return on your investment than what the market is generally providing (as represented by the Cap Rate). If your ROC falls below the Cap Rate, it could indicate that your project is not performing as well as the market average.
2.) In terms of using ROC in your analysis, it's indeed a useful tool to gauge the potential profitability of a project. A spread between ROC and Cap Rate can indeed represent future growth in potential NOI. A larger spread could indicate a higher potential for profit. However, it's also important to consider other factors such as the risk associated with the project, market conditions, and your overall investment strategy.
Remember, every investment opportunity is unique and should be evaluated on its own merits. These are just general guidelines and may not apply in every situation. Always do your due diligence and consider seeking advice from a financial advisor or experienced professional.
Op here. Thank you for the insight, extremely helpful.
Hah, that is a bot
Damn, I'm a f**** idiot. Robots 1 Me 0
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