Updated 7 months ago on . Most recent reply
Cap rate versus interest rate
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!
Most Popular Reply
@Arthur Schwartz yes if the interest rate is higher than the cap rate, the more you borrow the lower your return. Personally I think it is downright stupid to buy at a cap rate below the interest rate. It is an indication the market has gone to far.
Yes there are exceptions as @Henry Clark points out. Also if you are buying a property to reposition and increase the rents and value, it might make sense to take on that short term cost and risk.
The bottom line is; your thinking is correct. Sadly many new investors don't understand the basic math and it can lead to bad decisions.