Question

A new residential development will face competition from other new developments, other builders, and sales of existing homes. To determine if demand in that market segment will be sufficient to justify proceeding with the project, a developer would be most interested in estimating:
A. a risk premium.
B. capture rate.
C. capitalization rate.
D. risk-free rate.

Answer 1

Answer:

C. capitalization rate.

Explanation:

• The cap rate is the rate that the developer of the real estate would measure the valuation of the different real estate investments. It is often calculated as the ratio between the net operating income that is produced by an asset and the original capital cost.

• Alternatively, it's the current market value. however, the investor must take the opportunity cost into account. The cap rate is based on Net Operating Income.  

• The caps can be only recognized by the cash flow of real estate investment and not the change in the value of the property. For example, a property is delivered at an 8% capitalization or its increases by 2% delivering at 10% of the overall rate of return.  

• The realized rates of return are depended upon the amount of the borrowed funds, and leverage, that is used to purchase an asset.