If a property's cap rate changes from x to y, how is it calculated to keep the value constant?

To determine how a change in the cap rate affects the value of a property while keeping the value constant, the correct calculation involves the ratio of the change in the cap rate to the original cap rate. Specifically, the formula (y - x) / x expresses the percentage change in the cap rate.

The cap rate, which is the ratio of a property's net operating income (NOI) to its value, is foundational in real estate valuation. When the cap rate changes from x to y, this indicates a shift in the investor's required rate of return compared to the income generated by the property. If you want to maintain the property's value constant despite this change in the cap rate, you need to understand the percentage change represented by (y - x) / x. This ratio provides insight into how much the income must adjust relative to the new cap rate in order for the property's value to remain stable.

Using this approach equips investors and analysts with a clearer understanding of cap rate dynamics and their direct impact on property valuations. Understanding this relationship is crucial for making informed investment decisions and for performing accurate financial analyses in real estate.