I've been searching around the Yonkers/New Rochelle and Stamford/Greenwich area and the cap rates are incredibly low; almost not even there. I am seeing 1% - 3% cap rates in these four cities. What gives? How does one make money? I was looking at buildings between 1.2m - 2.5m and these cap rates are pulling in roughly 1000 - 1200 per month per building. This also assumes an agency loan hovering around 4%. It hardly seems worth it. Is the market too hot in these areas to buy anything? 

@Mike A. people in low cap markets make money by finding a value add (ie mismanaged or dilapidated) distressed property and increasing it's value by fixing it up and managing it well, thus increasing the income generated by the property. Additionally, many expensive markets simply serve as a safe place for big money to be placed and protected. Those who have wealth often take less risk with their capital after they've accumulated a lot and look to preserve what they've accumulated by investing in low cap ultra safe investments. For that type of buyer they care less about return and more about capital preservation.  

Originally posted by @Brian Gerlach :

@Mike A. people in low cap markets make money by finding a value add (ie mismanaged or dilapidated) distressed property and increasing it's value by fixing it up and managing it well, thus increasing the income generated by the property. Additionally, many expensive markets simply serve as a safe place for big money to be placed and protected. Those who have wealth often take less risk with their capital after they've accumulated a lot and look to preserve what they've accumulated by investing in low cap ultra safe investments. For that type of buyer they care less about return and more about capital preservation.  

 Perhaps, but these buildings were built within the last 30 years and seem to be in excellent condition so there's no upside there. If one is spending a million dollars or so for 300 bucks a month profit per building, not unit, there seems to be little reason to do so. One can do better by buying treasuries and zero risk and then margin that bond and easily use those funds to buy more and more bonds to compound their return with basically zero risk. One can easily borrow a million bucks against their securities for around 3 pts. Then a person can margin those newly acquired holdings and margin again to pull 5% - 6% compounded return. No one can get a safer return than US treasuries.

I've looked at 12 deals in the last month with CAP rates in said locations between 3% - 5%. If you have a mortgage at 4.5% you are either losing money from the property every month or through inflation.

Originally posted by @Mike A. :

I've been searching around the Yonkers/New Rochelle and Stamford/Greenwich area and the cap rates are incredibly low; almost not even there. I am seeing 1% - 3% cap rates in these four cities. What gives? How does one make money? I was looking at buildings between 1.2m - 2.5m and these cap rates are pulling in roughly 1000 - 1200 per month per building. This also assumes an agency loan hovering around 4%. It hardly seems worth it. Is the market too hot in these areas to buy anything? 

The CAP rate is the amount of annual net net income divided by purchase price. The CAP rate does not include an agency loan. It is considered the all cash return. I did a quick search on LoopNet and all the multifamily in Yonkers that have advertised CAP rates higher than 3%. The average is well over 6%.

Keep in mind cash flow is only one aspect of real estate investment. When using leverage, you have to calculate return based on cash invested. You also want to figure in capital retirement, which adds equity. In addition the asset is likely appreciating. On top of that rents appreciate over time, so there is built in inflation protection on your cash flow. The final thing to consider is tax treatment. With depreciation and interest expense, you often have a net loss which reduces your tax liability to nothing.

My point is that just comparing a CAP rate to a treasury yield is not a complete comparison. Real estate will outperform, even when CAP rates are 5-6%.