"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.
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Feb 5, 2009