Valuation and Analysis, 14% of the examination
Capitalization rate
The rate of return used to convert net operating income into value.
The IRV triangle carries the arithmetic: Income over Rate gives Value, Income over Value gives Rate, and Rate times Value gives Income. A lower cap rate means a buyer accepted less current return, which the market normally reads as lower risk or stronger growth expectations. A higher cap rate means higher current yield and usually higher risk.
What this is confused with
The exam rarely asks for a definition. It describes a situation and offers two terms that both sound plausible.
Gross rent multiplier
GRM uses gross income and a price, with no deduction for vacancy or expenses.
Cash-on-cash return
Cash-on-cash divides cash flow after debt service by the cash invested, so it depends on financing. Cap rate ignores financing.
See also
See it in a question
One question from Valuation and Analysis, so the term lands in the context the exam uses it in.
An appraiser values a 40-year-old single-family home in an established neighbourhood with many recent sales. Which approach carries the most weight?
Written to DRE's published topic list. Not a real examination question, since reproducing those is a misdemeanour under B&P Code section 123.