Confused about cap rates

[Dave Page]

I understand a good cap rate to be 5-8% but all this depends on cash or financed investment. For example.. I can buy a multifamily unit that has a cap of 8.5% If I pay cash. So what is acceptable for financed? If I can pay cash should I? Or should I finance and be happy with a fraction the of cashflow from financing?

[Immanuel Sibero]

@Dave Page

Cap rate is more of a measure of value and risk for a certain class of property in a specific market, so there is no such thing as a good cap rate or a bad cap rate. For example, if you purchased property at 5% cap rate in a market where similar properties had traded for 4% cap rate then you might have gotten good value. Similarly, if you had purchased that same property in a market with 6% cap rate then you might have overpaid for that property. Notice that this also means a property cap rate does not depend on whether you pay all cash or you finance the property (i.e. cap rate stays the same regardless of your capital/funding structure).

If you do a search on "cap rate" on Biggerpockets, you will for sure get the impression that cap rate is a measure of "performance" of a property whereby the higher the cap rate the better the performance. However, cap rate was never meant to be a measure of performance. Cash on Cash or IRR are much better performance measures. So I'd say resist the temptation to look at cap rate as a performance measure. I would also search on "cap rate" here on Biggerpockets, you would find it insightful.

Cheers... Immanuel