Why does a higher cap rate mean a riskier investment?
If a property generates a NOI of 100,000 and the property is being sold for 1,000,000 then the cap rate is 10%. People say a higher cap rate is a riskier investement. If I get a bargain for this property and buy it for 800,000 instead of 1,000,000 the cap rate is 12.5%, isnt this a good thing? I dont get how this would be considered more risky if I winded up getting a better deal for the same income producing property.

Lets say I get ripped off and buy the property for 2,000,000 and the NOI is the same 100,000, the cap rate is 5%. Supposedly this is considered to be a less risky investment when I'm just overpaying for the property. I feel like higher cap rates should be less risky and low cap rates should be more risky. Can someone explain why this isnt accurate?
[{"id": "hi5p8u2", "text": "Generally, a cap rate is determined by the factors below. This is not an exhaustive list, just the main points taken into account by pricing a property. The cap rate in your example would not increase by 2.50% without one of the factors below causing such increase. A newly built amazon warehouse with the same NOI as a 50 year old hotel will have different cap rates due to the risk of the product type, age, etc (factors below).   \n\n* Age, location, and status of the property\n\n* Property type \u2013 multifamily, office, industrial, retail or recreational\n\n* Tenants\u2019 solvency and regular receipts of rentals\n\n* Term and structure of tenant lease(s)\n\n* The overall market rate of the property and the factors affecting its valuation\n\n* Macroeconomic fundamentals of the region as well as factors impacting tenants\u2019 businesses", "replies": [], "depth": 1}, {"id": "hi5q8ee", "text": "What you're referring to is Yield on Cost. In YOC, the Yield (NOI) divided by the Cost (what you paid) is better if the % is higher. However, CapRate is more of a larger term. Use Cap Rate in a more macro term. For example, if you are risk-averse opt for an area, property class, or asset with a lower cap rate. Basically, because you know the NOI will hold, the market will adjust to reflect the value of that 'safe' asset. If you are purchasing somewhere where the asset might sit vacant for 7 months, or the tenant may get evicted, you will expect to make more money relative to what you spend. Let's say someone sells you a property netting 100k and for 800k. If the average capitalization rate for that asset is 10% in that area then yes, you've got a sweet deal. The CapRate on the property was 12.5% but when you go to sell, the rate will drop and you will appreciate your asset. However, if you buy it for 2,000,000 at a 5 cap, when you go to sell (assuming the NOI is still 100,000) the market will adjust and the price will come back down. So unless you're buying from a sucker, or you are the sucker, the caprate of the asset class &amp; area will factor into the market rate of sale.", "replies": [], "depth": 1}]