what is a good capitalization rate?

6 Replies

I currently have one rental property and am looking into purchasing a second one.  As I drill down into this industry more questions arise and I am curious what would be considered a good capitalization rate.

@Randall Hoeber Market cap rates depend on the type of property, the leases, the credit, etc. A triple net leased Walgreens with a 3 year lease could be a 5-6 cap, while an older apt bldg mIght be 8-12. But this is just one measure. I had a great return on a property that I bought on a 3 cap. What? You would never buy a 3 cap? Well, it was a retail center that was 25% occupied, with one below market lease. I spruced it up, leased it up, and sold it full on an 8 cap, which was about 4 times the purchase price, 18 months later. There are buildings I wouldn’t buy on a 15 cap, if the lease is above market with a short term.

So many factors at play here. Lower cap rates indicate safer investments with lower potential returns while higher cap rates often carry more risk. 

The easiest way to determine a good cap rate is to have a realtor pull up rental sales in the market. If you can get rental rates and sales prices, you can then figure out a typical market cap rate. Then figure out if your investment is better or worse than the market at large.

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