Does anyone buy based on cap rates in HCOL cities?
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[{"id": "g05wjvx", "text": "Sounds like small investors who end up paying for the land (which is very expensive in Toronto) and location. Might also be a capital investment rather than an income one.", "replies": [], "depth": 1}, {"id": "g0606bh", "text": "Is it foreign money? Lots of Toronto investors also willing to accept low caps or negative cash flow for speculative purposes.", "replies": [], "depth": 1}, {"id": "g0616z1", "text": "While cap rates used to be one of the primary metrics when assessing a deal, as cap rates have begun to shrink to the 3 and sub 3 level, it\u2019s slowly changed to a story of $ per door, accepting super low cap rates expecting a reposition play, or as the other comment said, baking on value appreciation to help bump up the capital returns", "replies": [], "depth": 1}, {"id": "g063gzf", "text": "A market cap rate is a 1-year return on a stabilized asset.\n\nIt could be that the assets you are talking about are\n\n* unstabilized, meaning the vacancy (economic or physical) is above the market rate\n* used improperly, meaning there is a chance to raise NOI either by increasing income or decreasing expenses or demolishing the improvements and re-developing\n* appreciating, the property models shows that equity return is equal to the cap rate + the change in property values, so a 3% cap rate with a 5% appreciation is an 8% cap rate, the same as a 9% cap rate on a property that is declining in value by 1%\n* being held for tax benefits or income shielding, rather than equity return. I don't know why this would happen, but maybe investors believe Toronto is exceptionally safe and therefore a low return (similar to bonds) is acceptable combined with some tax benefit\n\nLikely, it is some combination. Buyers believe they have a little room to increase the NOI, it is a safe bet, and likely to increase in value over time.", "replies": [{"id": "g06mf42", "text": "&gt;A market cap rate is a 1-year return on a stabilized asset.\n\nA cap rate is not a measure of \"return\".  It is a valuation metric.  In a 10% cap rate market investors have paid $10 for each possible dollar of NOI.  In a 5% cap rate market that dollar of NOI is selling for $20.\n\nAlso a stabilized asset will sell for the same cap rate as a non stabilized asset.", "replies": [], "depth": 2}, {"id": "g07gzg6", "text": "&gt; so a 3% cap rate with a 5% appreciation is an 8% cap rate\n\nThis makes no sense.  If a $100,000 NOI is bought at a 3% cap rate then the value is $3,333,333.  If the property value increases 5% then the value is $3,333,333 plus 5% say $3,500,000.  Now that increase only happened because the NOI increases and the cap rate stayed the same, the cap rate DECREASED and the NOI remained the same, or a combination of the two.  \n\nWhere on earth are you getting an 8% cap rate?  That would mean the value decreased drastically or the NOI went up dramatically but the market wasn't interested.  Can you show any math to this convoluted assertion?", "replies": [], "depth": 2}], "depth": 1}, {"id": "g06fkjn", "text": "Most sites in Vancouver are rezoning/redevelopment plays. CAP is based on future potential NOI not current NOI.", "replies": [], "depth": 1}, {"id": "g06m7a9", "text": "I think you don't understand what a cap rate measures.  Cap rates come from an income approach to value called direct capitalization.  If you are in a 3% cap rate market then investors HAVE paid $33.33 for each dollar of possible NOI.  V=i/r   So if you have 3% cap rate comps of course you are going to use them to help determine market value.  It is the market that has a cap rate not a building until it has sold.  And if everyone is getting $33.33 per dollar of NOI why would any seller let their property go for only $10 (10%  cap rate) or even $20 (5% cap rate) ?", "replies": [], "depth": 1}, {"id": "g06s7yt", "text": "Isn't the plan for people basically to leave HCOL now that companies are gonna be way more friendly towards online work now?  Guh", "replies": [], "depth": 1}]