Which statement regarding cap rate and value is true?

The relationship between capitalization rate (cap rate) and property value is indeed an inverse one. The cap rate is calculated by dividing the net operating income (NOI) of a property by its current market value. When the cap rate rises, assuming the NOI remains constant, the calculated property value must decrease. This is because a higher cap rate indicates that investors require a better return on their investment, leading to lower valuations for properties producing the same amount of income.

When market conditions shift and investors demand higher returns, properties become less valuable in terms of their purchasing price relative to income generation. Therefore, as the cap rate increases, the estimated value of the property goes down. This inverse relationship is a fundamental concept in real estate finance and investment analysis. Understanding this dynamic helps real estate professionals assess market trends and make informed investment decisions.