Important Points About Cap Rates
Ro: Overall rate of capitalization, or "going-in" cap rate.
Ro: A ratio of initial cash flow to value
Future cash flows and changes in asset value also are important
Not a yield/discount rate.
Direct capitalization only uses first year NOI, but Ro reflects all future cash flows:
Transaction prices of the comparables reflect the value of future cash flows.
In turn, the cap rates extracted from these purchases do so as well.