Wealth Opportunities in Commercial Real Estate: Management, Financing, and Marketing of Investment Properties

Inverse Relationship between Cap Rate and FMV

If everything else remains constant and if the general market cap rates increase, which means essentially that investors demand a higher yield, what happens to value? There is an inverse relationship between Cap Rate and FMV. As Cap Rates increase, FMV decreases. The logic is simple. If you demand a higher return, yet all other factors, that is, NOI, have not changed, you must receive a reduced price to achieve the higher yield. In our example, if the Cap Rate increases to 10 percent, the FMV is reduced from $10,200,000 to $9,180,000.