Finance
What is 'cap rate compression' in a Hawaii real estate market and what causes it?
AA. The government reducing maximum cap rates through regulation
BB. A decrease in cap rates (often seen in low-interest-rate environments or high-demand markets) meaning buyers are willing to pay more per dollar of income, increasing property values✓ Correct
CC. A compression in the range of cap rates between different property types
DD. An increase in property operating expenses that reduces NOI
Explanation
Cap rate compression describes a market trend where cap rates decline over time. When investors are willing to accept lower returns (lower cap rates) because of low interest rates or strong demand, they pay higher prices for the same income.
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Key Terms to Know
Capitalization Rate (Cap Rate)
A rate used to estimate the value of income-producing property, calculated as Net Operating Income divided by property value.
Net Operating Income (NOI)The annual income generated by an income-producing property after subtracting operating expenses, but before debt service.
AmortizationThe gradual repayment of a loan through scheduled periodic payments that cover both principal and interest.
Adjustable-Rate Mortgage (ARM)A mortgage with an interest rate that changes periodically based on a financial index, usually after an initial fixed-rate period.
Math Concepts
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