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That’s right. A cap rate is just the inverse of a multiple. A 5% cap rate is just a different way of saying $20 in value for every $1 of NOI.
Think of a cap rate as the yield or as the ebitda margin of a property. Yield is inversely correlated with the value of a something much like a bond or anything else. An example:
a building gives off $4 a year and you bought it for $100. If the value of the building goes to $110, the NOI is still $4, so the cap rate/ yield has gone down. It went from 4/ 4% to 3.6/3.6%.
I'm assuming you are talking about entry cap rates. In short - yes, but want to caveat that this shorthand applies only for stabilized properties.
For properties that require value-add, the cap rate is artificially low because of the depressed NOI. For a property like this, the entry cap rate isn't a good barometer for potential return and risk. That's why value-add/opportunistic buyers care more about stabilized cap rate (stabilized NOI / total cost basis) and compare them against market cap rates - similar to how you calculate a development spread, if the difference between the stabilized and market cap rate meets your minimum threshold, then you move forward with the deal (barring any red flags)
Does your shop compare the spread between stabilized and market caps vs your value creation spread (stabilized and going in)?
We calculate both but we don't compare them against each other explicitly.
For deals with a heavy value-add component, we want to see how much NOI we're projected to create - the value creation spread tells us this, the higher the better obviously (we use total basis as our denominator to make it apples to apples)
After we account for how much NOI we're likely to create, we'd want to understand how much a buyer today would be willing to pay for that stream of stabilized NOI. This is where we compare stabilized vs. market caps -- the difference between the two is simply the projected profit we get for bearing the risk of doing the value-add
Obviously if your value creation spread is higher, all else equal, you're going to capture a larger return at exit (you're capitalizing all that NOI growth at a "tighter"/lower market cap rate). But these are just shorthand ways to filter out new deals. During later stages we always project out cash flows and sensitize critical assumptions to see how returns fare (this is where the DCF comes in handy)
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