Cap rate

[Mike Hanneman]

Hey quick question here is the cap rate the percentage of income compared to expenses?

[Account Closed]

Originally posted by @Patrick Liska:

  and to answer your questions, yes a higher cap rate means a better cash return. 

I'm not sure what you mean by "cash return" or even how you calculate it but I would say that a higher cap rate DOES NOT mean a better cash return.

Investors that use cap rates are looking for profit.  They are aware of cash flow but that is not their main objective.  If cash flow were profit then it would not make sense for an investor to pay more for less profit.

A cap rate assumes no financing so equal NOI's at different market cap rates means the LOWER cap rate has the more desirable NOI. The cash flow would be equal.

$100,000 NOI at 10% = $1,000,000 market value

$100,000 NOI at 5% = $2,000,000 market value.

The NOI is the "cash flow" so it is equal at $100,000 for each property.

BUT the lower 5% cap rate property is perceived by the market as more desirable.  Probably it is anticipated to be more profitable.