What Is A Good Cap Rate? (Low? High? In the Middle?)

So you’re interested in buying commercial real estate but you want to know the difference between a low cap rate and a high cap rate investment? The amount of work going into each property can be drastically different. Let’s do a brief overview of triple net properties, how cap rates work on them, and then, I’ll dig into the advantages and disadvantages of high and low cap rates.
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[@TylerCauble]

What do you think is a good cap rate and why?

[@serg_lupescu]

Definitely high cap rate, 8-10% is usually a good rule of thumb in the deals that I do.

[@trev138]

Great video. You explained this better than my professor in my graduate level real estate finance class.

[@TylerCauble]

That’s great to hear! Glad you enjoyed it

[@gedward86]

Great video explaining the basics.

[@TylerCauble]

Glad you liked it

[@alexag7686]

Tyler! I am studying for my real estate exam in California and I couldn't for the life of me understand why higher cap rates are higher risk, and all the study materials weren't making sense. I get it now, after watching your video, thank you!

[@TylerCauble]

That’s great to hear, Alexa! Glad the video helped 😁

[@RonaldSimonKahn]

Thanks!

[@TylerCauble]

Anytime 👊🏼

[@JiuJitsuRealEstateFmlySB]

Thanks Tyler.

[@TylerCauble]

Absolutely 🤙🏼

[@serg_lupescu]

This is explained so well! Keep them coming.

[@TylerCauble]

Thank you! Will do!

[@sundayserjohn3619]

Most helpful cap rate explaination ever

[@TylerCauble]

Thank you!

[@kadegentry304]

Great video Tyler. With financing on these NNN properties, do you see seller carry typically on the higher or lower cap rate properties?

[@TylerCauble]

Appreciate it. No, typically they want to fully cash out and 1031 exchange into the next asset. We rarely see seller carry on NNN investments

[@user-cg8to6zv1l]

What if the property is a vacant multifamily, it has no income at the moment. How would you get a cap rate to value the property, would you create a pro forma for the expected NOI? Then how would you get the cap rate? Would you divide that by the purchase price and renovations combined?

[@TylerCauble]

You wouldn't be able to get a cap rate in that case since there is no income. You'd be buying based on a price per square foot and using those numbers plus your renovation costs and rent projections to get to an "end" cap rate when you're stabilized on the property

[@vishy099]

Hey Tyler, I guess I see some things a bit differently here. I heard you saying low CR properties are low NOI and high CR have high NOI. My belief is low CR properties have their NOIs at almost-max levels with only periodic increases to push them upwards. While high-CR properties have a fair bit of room to grow in NOI terms due to increasing stabilization over time and the value adds. Am I right in thinking this? For me this cap rate subject is proving to be a bit tricky to get hold of and I'd appreciate your help in resolving this :)

[@TylerCauble]

Yep - let me give you an example: Let's say the property is $1,000,000 At a 10% cap rate, the NOI is $100,000 At a 5% cap rate, the NOI is $50,000 So the higher the cap rate, the higher the NOI But yes - higher cap rate properties typically have better potential for NOI growth

[@vishy099]

@@TylerCauble got it, thanks

[@JudoChop33]

Well Explained and enjoyed you flow.. Thank you

[@TylerCauble]

Glad you enjoyed it!

[@RonaldSimonKahn]

Cap rate & Interest Rate? Cap rate must be higher than interest rate!!!

[@TylerCauble]

For sure!

[@deborahd.6228]

Yes, 4 to 7% cap rates in niche like strip malls w/anchor tenant/s or medical ie: skilled nursing facilities, medical buildings for specialists are good & stable.