When it comes to real estate pricing, most investors revert to the cap rate because it’s simple, and it’s the norm of the industry. But a correlation analysis indicates that cap rates have been largely unresponsive to alternative rates of return available to investors, with the exception of BBB bonds, over most of the past twenty-five years. Other pricing tools such as the Capital Asset Pricing Model; a comparative analysis with assets of similar credit risk; and the Gordon Dividend Growth Model provide much more elegant, yet still simple, alternatives to evaluating real estate pricing.
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