What is the relationship between cap rates and multiples?

What is the relationship between cap rates and multiples?

• A. Direct
• B. Inverse
• C. Equal
• D. Proportional

Answer: (B)

The relationship is inverse. Cap rate is defined as NOI divided by value, while the price multiple (value divided by NOI) is its reciprocal. So when cap rate goes up, value for the same NOI goes down, and the multiple goes down as well; when cap rate goes down, value goes up and the multiple goes up too. For example, with NOI of 100 and value of 1000, the cap rate is 10% and the multiple is 10x. If the cap rate increases to 12% (value falls to about 833.33 for the same NOI), the multiple drops to about 8.33x. This reciprocal relationship is why they move in opposite directions.

The relationship is inverse. Cap rate is defined as NOI divided by value, while the price multiple (value divided by NOI) is its reciprocal. So when cap rate goes up, value for the same NOI goes down, and the multiple goes down as well; when cap rate goes down, value goes up and the multiple goes up too. For example, with NOI of 100 and value of 1000, the cap rate is 10% and the multiple is 10x. If the cap rate increases to 12% (value falls to about 833.33 for the same NOI), the multiple drops to about 8.33x. This reciprocal relationship is why they move in opposite directions.