Risk

Risk is the uncertainty arising from the probability that events will not occur as expected.

 

Business Risk is the risk that is associated from the uncertainty of future income flows caused by business.  In real estate, business risk is the uncertainty of revenues, vacancy and collection losses, and operating expenses, etc.

 

The capitalization rate represents the return of the return on the investor's investment.  The reaction to risk in income producing property is similar to the reaction in any other investment.  The greater the risk, the greater the return expected by the investor.

 

If two properties have identical net operating incomes but one is perceived to be riskier, the riskier one will sell for less and the capitalization rate will be higher.

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