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At first blush I thought using Cap rates for owner-occupied property evaluations was like trying to figure out if you should by a car by comparing rental car rates to a purchase price. It seems foolish, because you need the asset. But, I do acknowledge that it is a good evaluation if you are making a decision on whether to purchase or lease – with the caveat that you have to make your own subjective determination on property value increases.

One thing though – I was told the property I was representing was being evaluated against another property with a Cap rate exceeding 13%. Quite frankly, I told that agent that his client should purchase that property if they really believe that. As a matter of fact, I wanted to know about it as well as I could use an investment like that!!!

I don’t believe that Cap rate comes without a high level of risk associate with it; it could happen, but I have a hard time believing it.

Word of Caution: If a developer tells you that by buying his / her property, you’ll achieve a Cap rate in excess of 13%, you better do a lot of homework to validate that & you better consider exit strategies.  After just a few minutes of evaluating the financial numbers, the bottom line was that the “13% Cap” property was being sold at $30 / sf more than the property I was marketing.

Moral to the Story:  Always use common sense & don't believe everything you're told.  Unless it comes from me, of course.

Have a great week out there!

See my listings at:  http://listings.loopnet.com/snicholson@cableone.com