What is best number for a cap rate when is high and the worst when is to low?

In Market Conditions - Asked by Ronnye L. - Dec 7, 2014
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Answer(s)

Glen W.
Lender/Mortgage Broker
Atlanta, GA

so for a high risk property, use a cap rate over 10%, for a lower risk (ie better property, tenants, etc..) cap below 5%, these are wide ranges and will vary based on location, leases, etc..

Dec 9, 2014
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Rod A.
Lender/Mortgage Broker
Tampa, FL

There are few, hard and fast rules regarding an appropriate cape rate (i.e. number), as each should be selected based on the unique characteristics, and market factors, regarding the property under consideration. For example, you can have two nearly identical properties, built at the same time, from the same plans and materials, and they could have vastly different rates.
More specifically, the cap rate should reflect the durability, and probability of of the income stream you are capping. Also, coming into play, regardless of your forecast, is market expectations, and market demand in general, for the property type, location, and credit, if any.
All other factors being equal, the greater the risk, regarding the durability,desirability and probability of the income stream, the higher the cap rate; conversely, less risk regarding durability and probability and the greater the desirability, of your fellow market participants, the lower the cap rate.
I would say the vast majority of all caps rates fall in the broad range exhibited, in your question, but there are exceptions; assuming, especially. if your are applying them to actual existing income.

Dec 9, 2014
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Ronnye L.
Owner/Investor
Fort Lauderdale, FL

Thank you for your input. I greatly appreciated it.

Dec 25, 2014
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Jose H.
Owner/Investor
Hollywood, FL

I would add that you can compare a risk fee rate of lets sat a 5 year gov't bond, if that's your expected holding time, would be the starting cap rate of the most desirable AAA property. If you expected to hold the property longer than compare to 10 yr gov't, etc...Use this because the money you're putting into this property could go to a secure US Bond instead As the property get's riskier (income stream risk, location risk, tenant risk) then see what corporate bond rates are, then look at what other properties in that market sold at that are similar and demand that cap rate or pass on the deal...never settle.

Jul 30, 2015
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