What cap rates should I aspire for in commercial investing?

Question

I'm interested in any kind of commercial. Just wondering what are realistic cap rates to expect. And any way to improve these?

Joel Owens · Answer

Commercial tends to be more passive. Those with millions to tens of millions or more care less about yield and more about wealth preservation and safety.

They will take a more passive 6 to 7 than a hard 11 or 12% return because frankly they do not need it.

You have 100k and get 20% you have 20,000 pre-tax annually. You have 1,000,000 and get 10% you have 100k pre-tax annually. One in almost any market would be virtually impossible the 20k to live in. The 100k in most market someone could live pretty well on that.

So again money goes up you need less yield for substantial cash flow.

Andrew Ashby · Answer

@Patrick Philip, I have to agree with others about the relatively high prices and low cap rates on commercial properties in Orlando right now...especially with low risk multi-family trading at 3-5% CAP rates right now. As others have said, you'll need to look further away in the secondary and tertiary markets for better cap rates and lower purchase prices. Polk County is not far from Orlando and may be a good place to look if you don't want to overpay. Publix is headquartered there in Lakeland, and it often gets overlooked.

Jeff Kehl · Answer

@Patrick Philip ever traded stocks? Real Estate is similar but more reliable. Meaning you can get a good solid income from buying blue chips like an office building in Manhattan but if you're looking to do better than you need to either have good timing/be lucky or be opportunistic or contrary.

You have probably heard plenty of stories of people who have made tons of money in real estate in the last few years both commercial and residential. Mostly, I see that as timing but also as luck. I bought properties in the 2010-2013 time that have doubled in value.  That time is mostly done in most places.

But you can still be opportunistic or contrary. There are always things going on that you can take advantage of to make a good profit.

A good example is how self storage did so well during the recession. It became much bigger than it was before. Or take senior care/assisted living. I think that is probably a good area to look into now.

But me personally, I look at what everyone hates. Office, because everyone works from home now(sarcasm), retail, because everyone buys everything on the internet and hospitality because everyone prefers to stay in an AIRBNB.

Commercial real estate is great because it offers so many options but one piece of advice I would give you is pick one to look at at a time.  Get to know it and the players involved because there is plenty to learn. REVPAR is something I've been studying recently.

Patrick Philip · Answer

Wow.

I'm willing to obtain all the education necessary. I am partner in a firm that wants to spend at least $1 million in cash every year for that foreseeable future.

All I know now is to look on LoopNet, TotalCommercial, and sites of individual brokerages like CBRE. I don't know how to find off-market deals other than Craigslist.

Daniel Kurkowski · Answer

In Minneapolis/St. Paul I just put together an 11 cap on industrial space with a 5 year NNN guaranteed by a $20mm organization.

I have another building under contract that will end up being around an 18% cap rate if I can get the proper city approvals.  It depends on how creatively you can put the deal together, who you know and what kind of risks and education you are willing to take on.

Taylor Hazard · Answer

Location and product type, tenant credit and lease term all mater in a huge way. For example class A industrial properties in port / coastal cities with class AA credit tenants and 10 years remaining term probably sells for a 3.95 cap in today's market whereas a retail strip center with 20% vacancy on the outskirts of secondary market might sell for a 12 cap.

I would recommend networking and connecting with commercial agents across all product types in the area you want to invest and start asking them the above question. You will notice (pretty quickly) a general consensus on cap rates among the brokerage community and can then start making a plan to move into commercial.

I'm happy to connect you with some folks in our Orlando office if you like.

Good luck,

Jimmy Klein · Answer

As others mentioned its all on location and asset class. The less riskier, the lower the cap rate. Multifamily has seen caps in the 3.5%-6% range in strong markets. Hotels typically have the highest rate of return because there is an operating business inside of it and cash flow tends to vary greatly each day.

Andrew Beauchemin · Answer

Agreed with Ryan, I don't see much outside of the 4-8% range on commercial investments.

Ryan Lee · Answer

It depends on many factors. Tenant type, location, asset type, etc. I would say that the way cap rates have compressed over the last few years that multifamily housing is going to be between 4 and 6% so anything over that is great. Office has seen lows too too but i think its probably safer to assume between 5 and 7%. Retail is extremely dependent on the tenants credibility, so I will need more specifics of the leases and and net income to give you a better idea what I think is good. Hope that helps a little.

What cap rates should I aspire for in commercial investing?

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