How the Cap Rate Spread is Impacted by Rising Interest Rates
[{"id": "dizt87k", "text": "This a neophyte understanding of cap rates for property.  Finance 101 at community college level neophyte.", "replies": [{"id": "dj38mt9", "text": "Could you point me a superior resource then? I understand the basics but would be interested to learn a more in depth analysis. Thanks.", "replies": [{"id": "dj5mlf7", "text": "https://libres.uncg.edu/ir/uncg/f/D_Winkler_Capitalization_1995(MULTI%20UNCG%20AUTHORS).pdf\n\nThe problem with cap rates is that while they have an exact definition (and calc), the cap rates of sold buildings doesn't follow the same logic.  There are other qualitative variables in play that significantly impact the cap rate.  \n\nFor example the 10Y T-bill is currently at 2.167%.  Los Angeles class A multifamily routinely trade at a 4% cap rate.  Given the the T-Bill has no actual risk, the premium earned for the risk associated with owning the property is 1.8%.  So a 1.8% more yield to absorb the risk of being sued, due diligence mistakes, possible insurance rate increases, new legislation that adversely effect the property, local market rent decreases, etc.  1.8%.  There are so many factor that could devalue a property...yet 1.8%  Doesnt make sense.  \n\nPersonally, I track and trend cap rates then use the current acquisition cap rate as a benchmark in the trend and try to view it as good/bad in comparison to other acq targets.  But seeing it alone is not good way to value property.", "replies": [{"id": "dj68m56", "text": "Awesome, I was hoping for something like this, thank you.\n\nI agree that the most important cap rates are those that are derived from a purchase.\n\n", "replies": [], "depth": 4}], "depth": 3}], "depth": 2}], "depth": 1}]