Low cap rates on buildings. How to make it work?

[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? 

[Brian G.]

@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.