In real estate, what does a negative cap rate indicate?

A negative cap rate indicates decreasing income potential as it reflects a scenario where the operating expenses of a property exceed its income. The capitalization rate, or cap rate, is calculated by dividing the net operating income (NOI) by the property's current market value. When the NOI is negative, which can happen due to high operating costs or vacant units without rental income, the resulting cap rate becomes negative. This situation suggests that the property may not be generating enough income to cover its costs, leading to concerns about its financial viability and potential for profitability.

Understanding that a negative cap rate is typically associated with challenges in maintaining a positive cash flow can inform investment decisions. Investors would recognize that purchasing a property with a negative cap rate may not yield the expected return on investment, as they would be facing declining income potential.