CAP Rates - Why are lower CAP rates better?
Hello real estate family, I have done commercial real estate and landing banking in Mexico (Riviera Maya) for 12 years and now I am getting ready to move my portfolio to the US (I´m from Rhode Island originally) into Multi Family. It is a cash market here in Mexico so I am new to traditional lending / leverage and some of the rules of thumb hence CAP rate ...
I am left confused as to why a lower CAP rate is better than a higher CAP rate. I understand that there may be more room for growth (larger margins due to increased rents and appreciation on lower valued property) but thats it. Essentially, if your CAP rate is HIGHER then your NOI is higher which in turn means you are receiving a higher percentage of net cash flow annually. Why would a lower CAP rate be better when you are receiving a less profit annually?
So if a CAP rate helps indicate the rate of return that investors can expect to generate on an investment property why would the lower the rate of return be better?