When a cap rate is as high as 13.6%, it brings down the value of the property. What does this say to investor?

In Buying Property - Asked by Jolly I. - Sep 8, 2009
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Answer(s)

Michael S.
Appraiser
Palm Beach, FL

This means that it is a ricky investment as the equity dividend rate would require a 10% return. This could also mean that the property is depreciating in value versus an appreciation. Investment with a 13.% cap rate should be viewed as having a higher risk than normal

Sep 8, 2009
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Paul S.
Broker/Agent
Glendora, CA

Cap rate is merely the relationship of the price to the income. A 13.6% cap means it has a very good net income relative to the price. Generally the higher the cap the higher the risk. Usually when something has a very high cap it is for a reason? Maybe the reamaining term of the lease is short, maybe a bad location, maybe the town it is in has something really wrong ( like unusual high unemployment), etc. Caps in general are rising (which means prices are lowering). There may be opportunity for a smart investor? Just beware and do your homework.
Paul Sylvester, CCIM

Sep 8, 2009
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David A.
Owner/Investor
Tempe, AZ

From my experience, in this market (AZ) cap rates are going to be much higher then normal. For example, I just purchased a bank owned duplex in AZ that sold last year for $229k for $60k. After several calculations, of local rental rates, water, repairs (8k) etc...my cap rate came out to be around 14.5%.

Sep 13, 2009
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Gregory G.
Broker/Agent
San Francisco, CA

Deferred maintenance, crummy area, lease is almost up, tenant is shakey, etc... Means a riskier investment.
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Gregory Garver - Commercial Real Estate Broker
Broker License# 01716531
(415)225-9894
gregory.garver@gmail.com

Oct 23, 2009
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