Trying to get a grasp on cap rates

[Dean Bogan]

I am a little less than a month into my research stage of investing.  I'm getting a good grasp of everything as I am very analytic.  However, cap rates are somewhat confusing to me.  I am under the assumption the lower the cap rate the less risk involved.  I am practicing analyzing deals and when I find what appears to be a great deal, the cap rate is 14 to 20 and sometimes over 20 percent.  when I play with the numbers and the deal gets worse, the cap rate goes down.  Can anyone explain why the risk factor would go down as the deal gets worse and goes up as the deal gets better?  Am i looking at this ALL wrong?

[Jonathan Greene]

If you are doing CAP rate for 4 units or less, you shouldn't be. I couldn't tell from you post, but when a lot of new investors talk about CAP rate they are applying it to small multis. CAP rate is for 5 units and up when the income is the driving factor of the property. For four units and under, those are residential properties, not commercial, and should not be judged by CAP rate. You can certainly use the calculation as a guide, but small multis are much more easy to crunch using rent roll, comps and experienced analysis.