Skip to content
×
Try PRO Free Today!
BiggerPockets Pro offers you a comprehensive suite of tools and resources
Market and Deal Finder Tools
Deal Analysis Calculators
Property Management Software
Exclusive discounts to Home Depot, RentRedi, and more
$0
7 days free
$828/yr or $69/mo when billed monthly.
$390/yr or $32.5/mo when billed annually.
7 days free. Cancel anytime.
Already a Pro Member? Sign in here

Join Over 3 Million Real Estate Investors

Create a free BiggerPockets account to comment, participate, and connect with over 3 million real estate investors.
Use your real name
By signing up, you indicate that you agree to the BiggerPockets Terms & Conditions.
The community here is like my own little personal real estate army that I can depend upon to help me through ANY problems I come across.
Buying & Selling Real Estate
All Forum Categories
Followed Discussions
Followed Categories
Followed People
Followed Locations
Market News & Data
General Info
Real Estate Strategies
Landlording & Rental Properties
Real Estate Professionals
Financial, Tax, & Legal
Real Estate Classifieds
Reviews & Feedback

Updated over 2 years ago on . Most recent reply

User Stats

161
Posts
91
Votes
Duke Giordano
  • Investor
  • Passiveadvantage.com
91
Votes |
161
Posts

Interest Rate and Cap Rate Delta When analyzing Syndication Deal

Duke Giordano
  • Investor
  • Passiveadvantage.com
Posted

Hey Guys,

I am trying to get an idea of whether evaluating the delta between interest rate and initial cap rate is a reasonable metric to evaluate when analyzing a syndication deal? For example, if the cap rate is 5.5 and interest rate on loan is 3%, the delta is 2.5. If so what are some target Delta's in different asset classes such as Multi-Family, Self Storage, Mobile home (I have heard a target Delta of 3 is desired in Mobile home class). Does this vary by market, or is this parameter independant of market geography? Id be curious to hear what some target metrics others look for in this delta when analyzing a deal. It goes without saying that this delta allows the deal to have a chance at profitability, so thats why it appears it should provide a value, at least on face value. In addition, the loan terms LTV/LTC I realize effect overall profitability in relation to this delta, but I am trying to keep it simple.

Thanks in advance for your time and answers.

Most Popular Reply

User Stats

2,283
Posts
6,908
Votes
Brian Burke
#1 Multi-Family and Apartment Investing Contributor
  • Investor
  • Santa Rosa, CA
6,908
Votes |
2,283
Posts
Brian Burke
#1 Multi-Family and Apartment Investing Contributor
  • Investor
  • Santa Rosa, CA
Replied

Unfortunately the economic intricacies of commercial real estate performance foreclose the ability to use rules of thumb and easy tests such as this. Interest rates and cap rates are related, but more like second cousins than twin siblings.

Imagine that interest rates are 3.5% and the property is being bought at a 2.5% cap rate (negative 1% spread). Does that make it a bad deal?  What if the rents were 20% below market, market rent growth is expected to be 8% per year, and the expenses are artificially high?  That 2.5 cap deal could be a grand slam.  Conversely, a 6.5% cap deal might be a dog if there’s no upside from making improvements and negative rent growth is on the horizon (like you are seeing in San Francisco right now).

If a genie were to grant me three wishes I think I just might use one of them to to ask that all real estate investors would immediately stop thinking that the cap rate associated with a real estate purchase means a darn thing.  Cap rate is simply a measurement of market sentiment, it has very little to do with investment performance.

Loading replies...