If you are a real estate investor, what kind of cap rate do you look for?
Anonymous
Dear Anonymous,
"Capitalization Rates" much like "Gross Rent Multipliers" are useful as a preliminary measure of any given building's ability to create cash-flow, relative to other available properties. Different markets will have different Cap Rates, the better the neighborhood, the lower the Cap Rate and vice-versa.
One could look at recent sales of comparable buildings, to ascertain what a typical Cap Rate would be, for a particular sub market. In doing so, an investor could calculate how much he or she, is paying for each dollar of income, relative to other investment properties in the same sub market.
Cap Rates however do not take the expense of financing into account, thus they do not give a comprehensive financial picture. The presence of leverage can drastically change "Cash-Flow" and "Capital Appreciation", as a measure of return, relative to the down-payment.
Return on Invested Capital, I believe is a far more useful measure of a building's investment value.
Alexander Bermudez
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