In my mind I use the current interst este plus .5 percent and add at least 3 percent. For example that the loan is going to be 5% add the .5% plus 3% = 8.5% cap. That is on order building 20 plus. Newer buildings you could go even less . But shoot for as high as possible. Don't believe the numbers the seller gives you run reality numbers. Watch out for owners that keep tenants that don't pay to up occupancy rate.
@Joe Platyan I think it is hard to make sense of something that is much below a 6 cap at initial purchase. I only purchase value add deals personally, so I am looking for deals that will be able to perform at 9 or 10 caps within a year of my re-positioning play. I am under contract on a 19 unit deal in Berwyn right now that was advertised as a 6.4 cap, but the actuals are saying it is probably a 4! The banks don't even want to finance deals that are this thin.
Cap rate is reflective of the risk of the asset, assuming it is in performing condition. Low cap rates = low risk asset. High cap rates = high risk asset. Neither is better or worse but rather is reflective of the risk appetite of the investor.
Remember cap rate is if you paid cash for the property and the your bank loan will eat into the cap rate. Think about it if interest rate is 5% and you cap rate is 4% on a 100% l loan you would be in the negative 1%.
I've required a cap of 14 before and bought at that. The asset had risk and needed work. What does 'in this market' mean to you? RE is local.
Risk or no, I'd rather take a nap than get less than a 6% return but that's just me. I can beat that in many other areas with less hassles.
Some triple net commercial may be worth analyzing at closer to 5 but the hunting is difficult and probability of success slim in my market. So I'm back to taking a nap.