what is considered a good cap rate?

as a new investor any info is helpful thanks
In Buying Property - Asked by mike p. - Jan 31, 2009
Report Abuse
Answer this Question

Answer(s)

Joe V.
Owner/Investor
Plymouth, MI

A good Cap Rate is anything that gives you positive cash flow. It's realy just that simple. CAP rates that are good in one area of teh country (sometimes even in one corner of a city) are different than another, so it is never an across the board number that is good. MAny investors though run their programs based on a minimum number for CAP rate before they even look at a property. Others will base it on the financing. For instance, if you are getting interest only financing for a NNN/absolute lease property (so your NOI is equal to your income since the landlord isn't responsible for any expenses other than teh debt service), all you need to cash flow is to have your CAP rate higher than your interest rate. Most of teh time you'll find that a good deal is to have tha CAP at least 2 pts higher...although you can go with a higher or lower spread.

Jan 31, 2009
Report Abuse
Glen W.
Lender/Mortgage Broker
Atlanta, GA

A good cap rate depends on the return you are willing to accept for the risk you are taking.

Feb 3, 2009
Report Abuse
Paul S.
Broker/Agent
Glendora, CA

"Good" cap rates vary with the type of property, location, stability of tenant, length of lease, etc. A good cap in California will be different in Wisconsin. The economic climate will cause the cap rate to rise of fall. Right now caps are rising in most areas of the country. Keep in mind that a cap rate only measures 1 year and does not take into account debt.
A more complete measure is IRR which measures the return on every dollar invested over a period of time. IRR includes income as well as debt.
So what is a good cap? It depends. A good cap for a Walgreen's is 7 but in California it might be 6.75. A corporate backed Taco Bell in Calif. 5-5.5%, in Florida 6 to 7.5%. However, if the lease has only 3 years left the cap could rise from 5.5 to 7.5 depending on the tenant.
As you no doubt can tell there is no difinitive answer as to what is a "good" cap rate. The answere is "it depends". What you will find is a "going" cap rate for a particular type of property in a particular area of the country.
One of your other answers from Joe V stated a good cap is anything that gives you positive cash flow. Completely wrong. You could have a 5 cap with a negative cash flow. He mentions debt considerations. Cap is never measured with debt. As a result cap would always be figured as if you paid cash and any rent would be positive if it exceeded expenses (not including debt). IRR would take into account debt.
If you need more information contact me a paulsylvester@remax.net

Feb 5, 2009
Report Abuse
Chris S.
Broker/Agent
Coeur D'alene, ID

Cap rates are on the rise across the country and it varys significantly depending on the property, the tenant, location, etc. etc. Remember the cap rate is just a quick "curb appeal" measurement, it's not a measurement of return! For a more detailed analysis of an income producing property you need to look at the IRR and dig into the past, present and future of the anticipated cash flow.

Feb 6, 2009
Report Abuse
Jim B.
Owner/Investor
Stoughton, MA

Cap Rates are a very poor measure of valuation. Multi-year Internal Rate of Return are better tools for valuation and measurement of investment.

Feb 9, 2009
Report Abuse
Karen H.
Developer
Beverly Hills, CA

Go to www.cieinst.com and take their free online course. It was immensely helpful to me. I took their 2 day intensive training and learned thoroughly how to evaluate commercial property including apartments and self storage. Their courses are great! I have since purchased 2 properties using their creative financing/no money down techniques and am now making over $12K per month in positive cash flow after all is said and done! I am thrilled!

Mar 18, 2009
Report Abuse
Tai L.
Broker/Agent
San Diego, CA

It depends on your risk tolerance. Higher cap rate, lower value, higher risk. Lower cap rate, higher value, lower risk.

May 22, 2009
Report Abuse
Kathy G.
Owner/Investor
Melbourne, FL

what is cap rate

May 1, 2013
Report Abuse
Kathy G.
Owner/Investor
Melbourne, FL

what is cap rate

May 1, 2013
Report Abuse

Welcome to Answers

LoopNet Answers is where the commercial real estate community shares what they know to help each other out. And it's all for free.

Ask a question to get advice from brokers, investors, professionals and local experts.

Answer questions to raise your visibility as a trusted advisor and build new relationships.

Ask a Question

Post Question