What "net" cap rate do you seek?

4 Replies

The 2% rule, often discussed here, peaked my curiosity as to what returns BP members seek and achieve. On my side of things, California retail caps trend anywhere from 3.5% to 6.5% for investment grade Tenants. 

Define "investment grade" tenants. Typically in CA you are lucky to get positive caps at all, so I'm guessing you are talking about the low-income low-quality areas?

It all depends on what areas you are looking in. If I were buying in CA, I'd be happy with any cap rate that was positive (because that would be impressive). If I were buying in Dallas, I'd be happy with a 5% cap rate. If I were buying in Philly, I wouldn't settle for less than 10% cap rate depending on the area. It depends on the property types, the areas, the price range, the quality, etc.

Investment grade tenants are commercial large companies with strong balance sheets and credit ratings. There won't be 2% gross monthly returns in that arena. 

@Juan Covarrubias Well I don't buy commercial retail. I buy SFH and expect a cap rate of 15-20%+ because I can actually get that here.

However when I evaluate a property it is not just about cap rate. Can I get financing? Can I pull the deal off at all? What would my debt coverage ratio be? How do I feel about the area and it potential to appreciate or risk of decline?

By the way, you mention "net" cap rate in you title. There is no "gross" cap rate or "net" cap rate. It is just cap rate. This leads me to wonder if perhaps you misunderstand exactly what cap rate is.

@Ned Carey  Just trying to not speak in jargon. I noticed the 2% rule was referenced as a 2% cap rate a lot; I imagined it was referenced as a "gross" return, of which cost in ownership still apply. Nonetheless, you are correct. 

@Ali Boone I was referencing Retail Properties with, strong credit, National Brand Tenants(i.e McDonalds, CVS, Starbucks, 7-Eleven, etc). In California, you see these types of properties trading at a 3.5%-6.5% cap rate(cash-on-cash return) with 10-20 year NNN leases.

My curiosity simply stemmed at the difference in Cap-Rate discussed here for "buy and hold" SFH's and from what I see in my day-to-day on the Commercial side.

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