BiggerPockets

WHAT IS GENERALLY A GOOD CAP RATE AND NOI FOR COMMERCIAL BUILDINGS?

For instance San Francisco, CA has a cap rate of 4-5% for multifamily buildings. In Fresno, CA you shouldn't buy a multifamily for less than a 8% cap rate.

Those cap rates for residential multi-family properties are simply telling you that these properties are overpriced (by a bunch). These properties are guaranteed to bleed cash!

Mike

Forget cap rate you need to worry about caps lock.

I agree Peter and tehrefore go for the double digit cap rates as I prefer the upsides.

A great CAP Rate is always said to be 10%+....but, that is the return, only if you pay all cash on the Property. Mostly, you also have a Loan against the Property, & that has to be deducted from the NOI numbers, to get your real return...& divided into your Investment is the Cash-On-Cash return.
You also want to look seriously at the underlying Business & their Financials, to make sure you will seemingly keep getting that monthly check from them.

THe cap rate is used simply to compare two similar income producing properties. It is the rate at which a property's income is being capitalized expressed as a percentage of the purchase price of the property.

It is a ratio used to compare one property against another, and should not be used as the sole factor in determining whether a property should be purchased.

Mathematically, it is defined by the equation:
Net Operating Income / Purchase price (or Estimated Value).

Since NOI is cash flow, your cap rate will have a direct relationship to cash flow. Holding all other things constant, if cash flow decreases, Cap rate decreases. This means that the net income (if any) is being capitalized at a slower rate compared to the purchase price or value of the property.

For instance, if one pays 1,000,000 for a property with an NOI of 100,000 the cap rate for that property would be 10%. If a similar property next door had a NOI of 80,000 with the same purchase price of 1,000,000 the cap rate would be 8%.

What that means is that the first property is capitalziing income at a rate of 10% of the purchase price per year. The second property is generating 8% of the purchase price per year. Again, holding all things equal, tenant type, quality of tenants and leases, expenses, etc. You would purchase property #1 over property #2 because it is returning a higher percentage of the purchase price. Your investment is being recouped quicker.

Again, the cap rate is a mathematical expression used to compare two relatively similar income producing properties.

It has nothing to do with tenant type or geographical location. It is simply a mathematical expression, like expenses/sf. However, since it is generally expected that newer buildings will have higher rents than older buildings, and high quality tenants will pay more for nicer space then a fledgling business would pay Cap rates are expected to be lower in new construction properties, and high quality assets, like high rises in urban areas.

You can extrapolate that further and make generalizations about geographic areas, saying that a certain neighborhood is known for better quality buildings and therefore might have a lower cap rate overall than the neighborhood one zip code over.

Analyzing details about income and expenses, tenant quality, and demographics about the property neighborhood are more important than analyzing cap rate, in my opinion.

The cap rate is a valuable tool to compare two like income producing properties.

Hope that helps.