if the cap rate is lower than 10%, does this mean it is more expensive to purchase?

I am still learning.
In Buying Property - Asked by BERT I. - Nov 30, 2008
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Answer(s)

Joe V.
Owner/Investor
Plymouth, MI

Yes. The higher the CAP rate, the higher the income from the property after expenses. CAP rate is a a rating % you get when you divide the NOI by the purchase price. The NOI (Net Opperating Income) is the difference between the expenses (not counting the mortgage) and the income.
Joe Villeneuve
Commercial Finance Specialist
CommercialFinanceConsultants.com
joe@CommercialFinanceConsultants.com
www.CommercialFinanceConsultants.com
734-455-9232

Dec 1, 2008
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Nick N.
Owner/Investor
Cincinnati, OH

The lower the cap rate the less cash flow you will have after expenses. If you have a property that nets 50k a year that you are buying at a 10% cap rate you will be paying 500k for the property. If you purchase that same property at a 9% cap you will pay $555,555. So to answer your question, yes, it does make the "same" property more expensive the lower the cap rate goes. But it doesn't have to mean that "any" property with a 9% cap is more expensive than "any" property with a 10% cap.

Dec 1, 2008
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ed h.
Corporate Investor
Monkton, MD

No. At a point in time, the value doesn't change. It is the buyers expectations that are changing. If the cap rate is going lower, say under 10% (your provided reference point) , the buyer is expecting less return on his investment. This is likely in a less risky investment, such as a newer building or a strong leasing market. If it is going higher than 10%, the buyer is expecting a higher rate of return on his investment. In the real world, this is usually caused by a perceived increase in risk, such as an area with higher vacancy rates/collections. That being said, on paper, your answer is yes, because it is a simple math equation. If the income stays the same(leases in place), the cap is inversely proportional to the value.

Dec 2, 2008
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