Final answer:
Cap rates in real estate are used to determine the potential return on an investment property.
They can be calculated for both infinite and finite time periods, and are influenced by factors such as interest rates, vacancy rates, and availability of credit and debt financing.
Step-by-step explanation:
Cap rates, also known as capitalization rates, are used in real estate to determine the potential return on an investment property.
They indicate the annual rate of return an investor can expect to earn on the property based on its net operating income and market value.
When assuming an infinite time period, cap rates are typically used to determine the long-term value and profitability of a property.
These rates are influenced by factors such as interest rates, vacancy rates, and availability of credit and debt financing.
If interest rates rise, vacancy rates increase, credit tightens, or debt financing decreases, cap rates may also increase as these factors affect the overall attractiveness or riskiness of an investment property.
On the other hand, when assuming a finite time period, cap rates are used to analyze the potential return on an investment property over a specific holding period.
These rates may be less influenced by factors such as interest rates or credit availability, as they focus more on the short-term profitability of the property.