An investor speaks of a 9% target return over a five-year hold while the appraiser extracts a 7% overall rate from sales. The yield rate differs from the capitalization rate in that it:
Correct Answer
B) Reflects the total return over the holding period, including reversion
Why this is correct: The yield rate (internal rate of return) reflects total return over an investment period, including income and reversion, while the cap rate is a single-period income-to-value ratio. Why the other choices are wrong: "Converts a single year's income directly into a value figure" describes the cap rate, not yield rate. "Applies only to properties financed entirely with cash" is false; yield rate applies to any investment. "Is always numerically lower than the overall capitalization rate" is incorrect; yield rate often exceeds cap rate if growth is expected. Exam tip: Yield rate is a measure of return over time; cap rate is a snapshot. Know the relationship: yield rate ≈ cap rate + growth.
Why This Is the Correct Answer
Why this is correct: The yield rate (internal rate of return) reflects total return over an investment period, including income and reversion, while the cap rate is a single-period income-to-value ratio. Why the other choices are wrong: "Converts a single year's income directly into a value figure" describes the cap rate, not yield rate. "Applies only to properties financed entirely with cash" is false; yield rate applies to any investment. "Is always numerically lower than the overall capitalization rate" is incorrect; yield rate often exceeds cap rate if growth is expected. Exam tip: Yield rate is a measure of return over time; cap rate is a snapshot. Know the relationship: yield rate ≈ cap rate + growth.
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In a discounted cash flow analysis, an appraiser uses a yield rate of 10% to discount projected cash flows but applies a terminal capitalization rate of 8% to estimate the reversion. Which statement best explains why these two rates differ?