Please help me understand why a higher cap rate is not always good for a property? (example-many times, higher cap rates are found in bad neighborhoods)
I have only a basic understanding of cap rate. I understand that cap rate is NOI/value of property. But I realize that cap rate gets higher when the NOI or the value gets lower. 

Example- If NOI is 100K and value of the property is 1.25M, cap rate is 8 percent. 

But if NOI is 100K and value of the property is 900K, cap rate is 11 percent. Now, is the property with a higher cap rate automatically a better investment? 

I have also heard that higher cap rates are found (typically, but not always) in bad neighborhoods. Any thoughts on these? if cap rate is not the be all and end all for valuing properties, what are better metrics?-IRR or cash on cash return?
[{"id": "di15zjn", "text": "Higher cap rate is not always good because that means there's more risk of the tenant defaulting", "replies": [{"id": "di16fel", "text": "&gt;  there's more risk of the tenant defaulting\n\nwhy is that? Is this again because higher cap rates are very common in bad neighborhoods (low income neighborhoods) where there is more of a risk of a tenant defaulting?", "replies": [{"id": "di1e44i", "text": "I don't think cap rates relate as much to the neighborhood as it relates to the tenant leasing the property.  \n\nAlthough it is true that in low income neighborhoods you'll find more tenants that might not have great financial track record.  \n\nTo give you a specific example.  Let's say you had two properties with the same NOI of $100K, but one had a 7 Eleven as a tenant and the other one had a locally owned and operated Hardware Store.  7 Eleven's risk of default is lower,  so you'll usually see them trade at 5% valuing the property at $2M. The Hardware Store would trade at 8%, valuing the property at $1.25M\n\nSince the 7 Eleven property is less risky, it's worth more, yielding a lower cap rate", "replies": [{"id": "di1rzpe", "text": "makes sense, thank you!!", "replies": [], "depth": 4}], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "di173oy", "text": "&gt; Now, is the property with a higher cap rate automatically a better investment?\n\nI don't know how anyone can answer this question. Do you understand that investors have different criteria for their investments?\n\n-\n\nHow about appreciation? Do all properties have the same appreciation %? Are all properties in the same condition? How about vacancy rates, are those the same on all properties? How about different markets?\n\n-\n\nNo disrespect but I think you should read more on real estate finance.", "replies": [{"id": "di1b9se", "text": "I agree. OP should consider buying Peter Linneman's textbook for a good foundation.", "replies": [], "depth": 2}], "depth": 1}, {"id": "di1xlkj", "text": "It's risk... if a Walgreen's is paying $200K in rent and has 20 years on their lease and you have another property that has liquor stores and new restaurants paying $200K in rent with average term of less than a couple of years then which property would you pay more for? The incomes are the same but...", "replies": [{"id": "di1xqwu", "text": "I will go with Walgreens as they might be a better tenant. off topic question, with these 20 year leases, are there kickers in the lease that will increase rent to keep up with inflation? It cannot be locked for a period of 20 years right?\n\nSecondly, it appears that cap rate is not the be all and end all, do you think there is any other metric that is more important than cap rate?\n", "replies": [{"id": "di1yd6a", "text": "In a lot of leases, there are generally built in steps to keep up with inflation.  You will see these laid out in a schedule on the Lease.  Option periods at the end of the primary term will also have a set bump in the rate.  ", "replies": [], "depth": 3}, {"id": "di1yuu9", "text": "Most leases have escalations, particularly if longer term... of course no telling if they'll keep up with inflation unless they're pegged to interest rates. Cap rate is the quickest shorthand to compare deals. An IRR run would be a better metric but it's more complicated and also takes into account financing sources etc. Cap rate doesn't explicitly adjust for future increases in rent etc...", "replies": [], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "di227lh", "text": "Cap rate is just the inverse of a multiplier when comparing values. Think of it this way, if you could pay 14x the cash flow for a property in the best location, would you pay the same or more for an identical cash flow but in a worse location? No, because the risk is higher. You might pay 10x. That's a 10% cap vs a ~7% cap. ", "replies": [], "depth": 1}, {"id": "di2hdh1", "text": "A couple of things here: first, don't think of the cap rate as the relationship between NOI and value, instead think NOI/price. Second any investment has an inverse relationship between risk and price which is where the cap rate comes in. The cap rate is one metric that allows an investor to compare two otherwise completely different properties with a common metric which is the cap rate. Third, the cap rate should be representing risk and that risk can come from many different areas, neighborhood, tenancy, tenant mix, remaining term, rent compared to market, the physical building, and so many others. Different investors have different risk tolerances and those must be identified (as well as what lenders like) to establish an accurate cap rate and many brokers have a hard time with that making the cap rate just one of many things to consider when analyzing a property. ", "replies": [], "depth": 1}, {"id": "dof3en3", "text": "2000 sf property bought at $200,000= 1%\n2000 sf property bought at $600,000=  .33%  Which is more profitable? Just like a cap rate it is not a measure of profitability.  It only measures what the market is paying for a NOI.  Obviously the lower the cap rate the bigger the demand for the NOI,\n", "replies": [], "depth": 1}]