The Cap rate is the economic return on an investment and is influenced by various factors. In the current economic climate, the cap rate in real estate has to be compared to alternative investments, including stocks, bonds and cash investments (money market accounts, certificates of deposits).
With interest rates as low as 1% per annum, major real estate investment firms are now considering prime commercial, multifamily and mixed-use properties at a 3% cap rate. So, far a $10 million dollar building, the investor would want to see net operating income (gross rents, less all operating expenses, real estate taxes and a management fee) of at least $300,000.
In addition to the cap rate, the major real estate investor is looking at the potential for rent appreciation, the building future appreciation in value, and development potential of the property.
Investors who are seeking properties with 8% to 10% cap rates are either looking at lower value properties with risk factors, or are living in the past and will lose out in the coming real estate boom.
Nov 15, 2012