what is a good cap rate for investment property
Cap rates do not remain static. Cap rates can fluctuate depending on the NOI or the value of the building. This can be due to market conditions or investor improvements.
Real estate investors often ask the question, "What is a good rate of return?". There is no one universal cap rate. It depends on many factors. We will also discuss how we define "good". If you are fed up with the "it depends" answer, the broker package contains information about potential cap rates that could be used to purchase an asset. This includes comparable sales rates. This should be viewed with caution as some assets might be cherry-picked, and not all assets are comparable.
Also, cap rates don't take into account debt. Other return metrics, such as cash-on cash returns or internal rate of return (IRR), should also be calculated as they provide a wider picture of the potential.
Cap rates do not remain static. Cap rates can fluctuate depending on the NOI or the value of the building. This can be due to market conditions or investor improvements.
Risk profile: All investments, real estate or otherwise, have returns that are directly related to risk. The return on a treasury bond is relatively low because it is guaranteed by the US Government's full faith and credit and has one the lowest risk investments. Junk bonds, on the other hand, are more likely to default because they have higher risk ratings, and offer higher returns. A lower cap rate (less than 5% in real estate) often indicates a lower risk profile. However, a higher caprate (greater than 7%) is often considered to be a more risky investment. A cap rate is an indicator of how much the investor considers the investment's return to be "good". An investor might choose to buy a Class A 98% occupied multifamily property in San Francisco at a 3% cap, which they consider a good cap rate. Or, a Class C single-tenant office in Richmond, Virginia, which is being offered at 100% occupancy at an 8% cap rate. Both investors are correct, they reflect a different risk profile and desire to take on higher risk with higher returns or lower risk. Real estate investors should ask themselves the following question: "Does my cap rate reflect the risk that I am willing and able to take?"
Many advisors will tell investors that a higher cap rate is better. A good cap rate should be between 5%-10%. This is partly true. An investor should choose a property with a higher caprate to get a better yield. Cap rates don't necessarily reflect all factors. When deciding whether to purchase a property, consider the investor's risk appetite, property location, property condition and ability to grow NOI. There are many other investment-specific factors. Low cap rates are an option for risk-averse investors.
An investor should always invest in property with a higher caprate, as it will forecast a higher yield.
This article will give you an overview of the factors that can impact how an investor determines what a good cap rate should be in any market or asset.