Capitalization (CAP) rate

[Tarcizio Goncalves]

Hi everyone, 

I am thinking of doing 1031 exchanges to sell my small multies to get into bigger properties (5+ units). Commercial real estate has cap rates to consider but I am having a hard time understanding cap rates. If I am just looking for cash flow, do I need to be worried about cap rates? If my cashflow goal is lets say 500/m, and I can achieve that on a property, does CAP rate matter? Appreciate any advice you all have. Thank you

[Mark Munson]

Hi @Tarcizio Goncalves

      Yes, cap rates matter. For example, let's say your gross $60k a year in rents on a $1M dollar property. And let's say the operating expenses are $10k a year, thus making the Net Operating Income $50k, or a 5% cap rate. With interest rates above 5%, that means you are losing money every year. You should be tracking every KPI you can, and taking the full context into consideration when accessing a deal. If you can find a property with a cap rate 4% above the interest rate, it is difficult to not make money. Obviously there are a lot of metrics beyond cap rates, but it should be considered.