Question on Cap Rates

[David Switzer]

I understand that Cap Rates are not a set number in an area/property, and they depend on many factors.  So here's my question:

How do you strike a balance between higher cash flow vs building value?  Example:

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Tenant A - Grandma Millie's Sewing Shop
Been in business 1 year, decently profitable, signs 5 year lease.
Rent = $60,000/year

Tenant B - Eye Doctor office.
Been in business 5 years, quite profitable, signs 5 year lease.
Rent = $55,000/year

Tenant C - Subway
5 year lease
Rent = $50,000/year
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If I assign the following Cap Rates, I get these building values:

Tenant A / 10% cap rate
60k/.1 = $600,000

Tenant B / 8.5% cap rate
55k/.085= $647,000

Tenant C / 7% cap rate
50k/.07 = $714,000
(or even $45k at 6% cap rate = $750k)


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I just made up all of these numbers.  What I'm basically asking is, how do I find the right balance between cash flow and increased building value?  I.E.  $15k more in cash flow per year vs $150k in increased building value