cap rates real estate

cap rate by zip code


Asset Type: It also affects the cap rate and how it is set. This is directly tied to historical performance and risk. Multifamily assets are more likely to have low default rates, and a larger amount of capital, due to the availability of loans by government agencies (Fannie-Freddie-HUD), to help with affordable housing. Multifamily assets are more likely to have lower cap rates because of their high performance and the necessity for people to have a place they can call home. As they are subject to higher default rates and underperform when the economy's doing poorly (i.e. Hotels are considered a riskier asset type because they have higher default rates and often underperform when the economy is not doing well (i.e. people don't travel as much for work or vacation). Hotel assets are more risky than other asset types. Therefore, the cap rate for hotels could be higher and the prices lower than those of multifamily assets.

5% cap rate —


Available Capital: While it does not impact the cap rate of a property's property, available capital is an important consideration in determining what a "good rate" cap rate is to decide whether to purchase that property. As a rule of thumb, buyers of commercial real property should not use mortgages or debt that is more costly (higher total cost of capital, origination fees, closing costs, etc.) than the property's stabilized rate. For the purchase or renovation of a property using debt, it might make sense to use capital that is more expensive than the cap rate yield in a short time to renovate the property and refinance to lower-cost debt. The buyer should not borrow more if the asset's cap rate is lower than current interest rates. Otherwise, it will dilute the property’s overall returns.

what is good cap rate


Asset Class: Each property type has three "classes". These denote the property's level of finishes and the strength of the tenants. This directly affects the rental rates. A property classified as "Class A", is the highest quality asset. It can command the highest rents and have the best tenants from a balance sheet and creditworthiness standpoint. The "Class A" property is the middle of the pack, receiving average rents and quality tenants. The last property in the class is a "Class B" property. This property is the least quality and thus receives low rents and tenants with low creditworthiness. Class A properties have the lowest cap rate and highest value, while Class C properties has the highest cap rate and lowest values. Class B properties, on the other hand, have cap rates that are between Class C and Class C and cap rates that are in the middle of Class A and C. The cap rates represent the asset's risk, real or perceived. To determine whether a caprate is "good", it's important to understand and compare the asset's quality to other assets in a comparable set.

what is good cap rate
what a good cap rate for investment property

what a good cap rate for investment property


Location is one of the most important factors that affect a property’s cap rate. In real estate, it is the old saying, "location, place, location", that is what matters. This sentiment shows the importance of location in determining an asset's worth. A market like San Francisco2 is more desirable than one like Baton Rouge because it has more jobs, commerce and transportation. A market that has more demand leads to higher property values. For example, the cap rates for San Francisco are lower than those in Baton Rouge and the property values in San Francisco is much higher.

calculating cap rate


As you can see, there are many factors which can influence the cap rate for an asset at any one time. A review of an asset must be done in order to determine if it is "good". This includes a comparison with other similar assets on the market at the moment of purchase, a review and analysis of the cost of capital and any alternative investments that could be made. Finally, the investor must assess their tolerance for risk and overall risk profile. There are many publicly available data that can help you determine whether the caprate for an asset is comparable to the risk-return of other assets. After doing the necessary diligence and accounting to account for variations in property relative to the comp, it's up to the individual's goals, personal preferences, and risk tolerance that determine what a good cap rate is

calculating cap rate
is a higher cap rate better

is a higher cap rate better


Deferred maintenance: How much deferred maintenance affects an asset's overall quality. A high level of deferred maintenance may make it difficult for an asset to be eligible for market rents. For example, a Class B multifamily investment with an 1980s vintage roof might be receiving market rents. However, it may need a new roof at a cost $500k. Another multifamily asset of the same class is located in the same location. The same vintage was used, but the roof has been completely renovated over the past 6 months. This asset is now beginning to rent at market rents. While the first asset seems to have a solid 12 month operating record, there is a significant capital outlay ahead. This will be costly and could potentially impact tenants as well as increase vacancy. Although the net operating income appears lower for the first asset, it is still highly desirable. However, there are no capital expenditures going forward. Prospective buyers may be less likely to consider the asset's caprate if it has a significant deferred maintenance expense. When comparing assets, the buyer might consider the return on investment (stabilized net operational income divided by purchase price plus any improvements). This will help determine which asset is best.

4 cap rate


Lease Strength: This determines the strength of a lease. Terms include length, rental rate and concessions, as well as rent increases or escalations. Penalties for breach and default provisions. Tenants also have obligations (such paying property taxes, insurance, maintenance) and financial strength. A 5-year lease with Google as the sole tenant and 3% annual rent increases and a guarantee by the parent company is a very different risk profile from an office building housing 50 tenants. They are also more likely to have small lawyers, mortgage companies and insurance companies. Google's strong corporate balance sheet would have likely allowed it to negotiate a lower per-square foot rate, lower rent increases and more attractive terms that smaller tenants. Google's financial strength means that the lease it has may be less risky to a buyer than a building with other smaller, less financially secure tenants. Strong leases of any asset type, whether multifamily, commercial, industrial, or office, will impact the property's risk perception. This will likely lead to a lower cap rate which in turn leads to a higher property value.

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