re 194 db 14

Discussion 14: Understanding Capitalization Rates

Unit 14: Direct and Yield Capitalization Title: What’s a Cap Rate?

INSTRUCTIONS

Step 1: Research & Share

1. Explain a Cap Rate:
   • In your own words, how would you explain what a capitalization rate (cap rate) is and why it’s important?
2. Analyze Cap Rate Variations:
   Below is a chart showing average cap rates in California for 2024 by property type and location.

   Property Type	Los Angeles County	Orange County	San Diego County	Bakersfield (High Cap Market)
   Apartments	4.3%	4.1%	4.5%	6.8%
   Industrial Buildings	5.1%	5.0%	5.2%	7.5%
   Office Buildings	6.0%	5.8%	6.2%	8.5%

   • Pick one property type (apartments, industrial, or office) and one market area from the chart above.
   • Why do you think cap rates for this property type vary between locations?
   • Compare a low cap rate market (e.g., Orange County) to a high cap rate market (e.g., Bakersfield). What do you think explains the difference in income potential and risk?
3. Your Perspective:
   • Would you prefer investing in a low cap rate market with more stability or a high cap rate market with more risk? Why?