Cap Rates - How Good is Good

I know this can vary by area, but it seems in some areas, the cap rates are lower due to the area being more in demand or else in an area of historically fast appreciaition.

My question is, what is your rule of thumb on whether a deal is worth going after in terms of cap rates?



Anything less than 10% bores me. I start to get a little excited at 15%.

The market her is no where close to that. I’d have to offer 30% of asking price to get cap rates near 15.

What area of the country you in?

A higher cap rate for buyer and a good DCR.The operatiing cost… vacancy… Moneydown to do commercial deal. experience person who closed commercial deal all day long. What is your gross and net ? Good rent rolls .100% ocuppied

If I can give you a word of advice, use the cap rate as a single indicator of a good investment, not as the only one. Too many people focus on a cap rate of 15% as the deal of the decade, which I can almost guarantee will turn into a disaster.

Cap rates are a static “snapshot” of the value of an income stream (NOI, not cash flow) in the market place. A much smarter tool is to use the IRR or overall rate of return, which will take into account the movement that will happen in the property when you improve it, lease it up, and sell it, etc. I assume that you are not buying an income property to sit on it and “hope” that it increases in value, but that you have a deliberate and intentional strategy and are looking for an asset that qualifies. First year Cash on Cash, cap rate, and the IRR will help you enormously in clearing through the chaff and getting at a real deal.

To answer your question, however, a property with an advertised cap rate of 15% will have considerable deferred maintenance (or ignored maintenance), and substantial capital requirements to get it to market properly. A cap rate at 10% is becoming less attractive, but probably merits examination to see where the money can be unlocked–every property has a way to do this. Most private investors I know these days want to see a 12% return or better on a smaller investment, with upside in the 20% or higher range due to management or value-added investment.

They will vary from product to product from buildings on the same block to just about everything…

As a stand alone indicator, they are not very good…

I once sold a brownstone on the UWS of NYC, for 850K… it had a 1% cap… maybe… about 2 years later, the owner sold the property for 3 million…

In this instance the opportunity was for someone to go into the brownstone, kick out all of the tenants and convert the property into a SFR… which he did.

A cap rate investor would have scoffed at the opportunity…

There is always a story behind the numbers, quality of area, quality of tenants, building, available financing, presence of market controls and available abatements can all factor into the pricing of a transaction…

ThomasMote says it well when he talks about IRR… cap rates are a good snapshot… they take on meaning compared with other similar properties and the story behind the CAP.

Here in the Texas market it’s difficult to find an apartment deal that offers even a true 7% or 8% cap rate. It seems that deals are selling for between a 5 to 7% cap rate. Not attractive at all, but there are still a few suckers out there paying it.

Please see my recent post on cap rate.