CAP Rate

[Berni Houk]

Can someone please explain why CAP rates are important....in simple terms??? Yeah...I am a bit slow! :)

[Account Closed]

Originally posted by @Steve Katuska:

Originally posted by @Account Closed:

Cap rates are not important for residential properties. 

http://www.caprates.net/cap-rate-definition.htm

Hi Bob - can you let me know why you don't see cap rates as a useful metric for residential properties? It would seem to me that this is still a great way to understand the return of a property, both relative to other properties as well as relative to other assets (stocks, bonds, etc.). Obviously it's not the only metric you would want to look at - but certainly seems like a valuable one to me vs being "not important". Thanks for any insight here.

The main reason is that there is no reliable third party source that analyses and reports on small residential sales. And even if there were it would only be useful in determining market value of NOI just like it is done in commercial properties.

Cap rate calculations only use operating expenses and ignore capex and appreciation.  How could you compare a 5 year 5% CD to a property bought at an 8 cap that will need a $20,000 roof in year three?  

Nobody uses cap rates to determine the return/profitability of a property because it can't.