If the overall capitalization rate for income property were to increase while estimated net operating income remained the same, what would happen to the resulting value estimate?

When the overall capitalization rate (cap rate) increases while the estimated net operating income (NOI) stays constant, the resulting value estimate of the income property will decrease. This is grounded in the relationship between cap rates, NOI, and property value, which can be illustrated through the formula for value based on capitalization:

Value = Net Operating Income / Capitalization Rate.

In this scenario, if the cap rate increases and the NOI does not change, the denominator in the equation becomes larger while the numerator remains the same. This means that the overall quotient—the property value—will be smaller. Therefore, an increased cap rate signifies a higher perceived risk or lower expected returns, leading to a decrease in estimated property value.

Thus, an increase in the cap rate directly results in a diminished valuation, fundamentally aligning with real estate principles regarding income-producing properties.