Cap Rate: When to use, is small or big better, and to find rate %
I am a little unclear if a larger or smaller is better. When and how often should I use it, how to find rate not the % but actual rate. IE; 6.5%, 7.0% etc. Thank you
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@Andy Morris your question is more complex than it seems. A higher cap rate means more cash flow (specifically net operating income) for a given price. A lower cap rate means less cash flow for a given price.
On the surface you would think that a higher cap rate is good. Maybe, maybe not. If a property is getting good market exposure it is going to sell for close to the market cap rate. If the marketplace is saying that the cap rate is high on a property, it is because the market views it as a risky property. Therefore the market wants more return for that risk. If the marketplace views a property as low risk it is willing to pay a premium price ( and therefore a low return) for that property.
EX; Property generates $50,000 a year (NOI)
If the property sells for $500,000 that is a 10% cap rate. The market is saying that is a relatively risky property
If the property sells for $1,250,000 that is a 4% cap rate and the marketplace is saying it believes that to be a pretty safe investment.