A Buyer's agent was using the Cap rate approach on contrasting possible purchases for commercial real estate in Nampa, a major growth area in the Boise Valley. He told me that the property we were being compared to has a 13% Cap rate. I told him to buy it, but my client, who was right next to me, didn't quite understand my response.
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