Posted by Mark (SDCA) on February 11, 2000 at 11:23:41:
It completely depends on the area. Even different areas of the same town can have different caps. I won’t even consider anything below 10 and at this point (I am getting picky in my old age!!) 12 is pretty much the bottom line for me.
I don’t see how a 7 cap could cash flow out.
As for the 20% in the stock market… I wouldn’t count on that forever. The historical average is just over 10 (just over 12 for small caps). The last 4 years have been an anomaly. And actually most stocks went DOWN last year. ONly a few at the top are holding up the average. Maybe it is a “new era” or maybe we are just buying more tulips… Ever hear of the Nifty 50 and a “can’t miss, hold forever stock” called Polaroid?? Off my sopabox now…
I am looking at a deal right now with a 10% cap rate. I have heard that anything above 7% is decent but this seems far too low, particularly when I could throw a dart at the stock market and make 20%. If I adjust the cap rate to 20%, I will cut the listing price in half, thereby inducing laughter on the part of the seller. Am I analyzing this stuff correctly? Thanks for any help.
Be sure you are including all the cost factors so as not to distort the cap rate. Remember the cap rate is IF you were wanting to invest ALL cash and hold. If you are looking for profit you must buy above the prevailing cap rate in order to assure yourself of that profit when you resell. If you have all that cash to invest then whatever return on investment you want is the cap rate you are willing to invest at.
If you took a class C apartment complex and did not properly evaluate the vacancy rate, the cash to fix deferred maintenance, or annualized repair costs you can distort the cap rate to show a completely different picture.
Re: What is a satisfactory cap rate? - Posted by JPiper
Posted by JPiper on February 11, 2000 at 18:15:26:
Please have the guy that told you cap rates in excess of 7 are decent give me a call…I’ve got some property to sell him!
To me a cap rate would be a starting point in analyzing an investment. It’s use would be to compare it with other properties for the purpose of establishing value.
However, once I had winnowed out the more attractive candidates based on cap rate…I would analyze based on some other factors…like perhaps return on investment.
I think what you’ll find is exactly what Mark said, that the cap rate is going to have to be 12 or higher to make much sense at all.
