Cap rate versus interest rate

[Arthur Schwartz]

Quick question: if the cap rate is 6% hypothetically, that is what would be received for an all cash purchase; correct? So if mortgage interest rates exceed cap rates, then the total return would be less regardless of the LTV, correct? Thanks, in advance, for the discussion!

[Henry Clark]

Cap rate is the same no matter cash only or debt only.

 Cap rate.  Net operating income divided by price.  Since interest expense is not part of Net operating income.   How you finance has no impact on Cap Rate.

Couple items to consider.

1. Capex needed. Exact same property, exact same NOI and Cap rate. Exact same financing. Which one would you pick? The one with zero or $100,000 capex requirements?

2. Cap rate- who gave you the NOI and the price? Did you validate. Let's say a Cap rate of 6. I can make it legally swing from 4 up to an 8. Plus their list price isn't necessarily your purchase price.

3. Cap rate- their cap rate isn't necessarily your cap rate with your business model. You might pay higher than it's worth knowing you're going to make more NOI with a different business model.

I would throw out the use of cap rate.  As mentioned above go with cash on cash type of measures.