cap rates what to look for

[Harry Wilson]

surely everyone wants the highest cap rate for their rental properties, but does a high cap rate sometimes indicate a downside? does a high cap rate indicate a bad neighborhood sometimes? etc

[Account Closed]

Risk and potential reward are always connected. Cap rate even when properly applied i.e based on years of good financial records, is not a guarantee Its just a projection. The risk is in the reality meeting the projection. If you have NNN property with Walgreens as a tenant, your cap rate is highly likely to be realized. And as such investors will pay more for each dollar of cash flow. If you buy a D class apartment building in a war zone, the theoretical cap rate may be much higher but risks of not getting that or any return are also higher. So investors will pay less for each dollar of cash flow. Think about bonds. Why were Greek bonds paying 15% while US treasuries pay less than 2%? Is the higher interest rate necessarily a better investment?