The cap rate provides a great way to quickly determine how relatively expensive an asset is. In fact, whenever you ask a broker how much a property is selling for, they'll most likely say it is selling for an X.X% cap rate instead of quoting an actual dollar amount.
There are many variables that affect the cap rate. For instance, a fully leased building will have a lower cap rate than a partially vacant building. Why? Because the fully leased building's cash flows are more certain and therefore the property is less risky. In general, the following items will lower the cap rate:
You will note that each of these items lowers the "risk" of the investment.
Check out our Real Estate Career Guide for even more information on cap rate and other real estate metrics!