How do you find cap rates in an area?

Question

Looking at a complex with a cap rate of 7%-- how do I find the cap rates of other similar properties in the area?  Sellers embelish these numbers....

Account Closed · Answer

That BP article would be 100% wrong about cap rates.  As far as your complex with  a 7% cap rate that is also ridiculous.  There is NO cap rate until you have a SALE.

There really isn't a cap rate PERIOD.  There are only cap rate COMPS from closed sales of similar properties.  A cap rate has NOTHING to do with profitability!  It is ONLY a measure of what someone paid for a NOI.  If you buy your complex at 7% cap rate and the market cap rate is 9% then you probably overpaid a lot for the NOI.

Just like sales comps you need information about the property/NOI.  If someone told you a house sold for $100,000 and another for $110,000 but you had no other information on the houses do you really think you could use them as comps?  NO!

Same with cap rate comps.  You need to see each calculation including all the individual operating expenses to determine if the comp is any good.   Having someone spout 8% without any backup is a joke.

Russell Brazil · Answer

I agree with the above, talk with the commercial brokers.  I think most "investors" I run into just make up a cap rate to be honest.

Brian Burke · Answer

Talk with brokers that are actively selling similar properties. They'll have their finger on the pulse of the submarket better than any published report.  Check Loopnet for other nearby similar listings and call the broker and ask about their listing and what they are seeing in the market.  Then pop the cap rate question.  Bonus: you'll have another set of eyes that'll keep you in mind when properties matching your criteria come to market.

Account Closed · Answer

Um, thanks?  But actually I am pointing out that you need to know actual cap rate calculations from cap rate comps to make a determination if you are buying over or below cap rate comps.  Once you have that factual information the only guessing is whether the market have moved up or down and if your subject property is superior or inferior to the cap rate comps.

From what I have seen here is that the guessing is by people that don't know what a comp is or how to calculate or utilize a cap rate.  So when someone spouts off a "number" ask to see the math.

There is a valid reason why commercial investors are willing to pay thousands of dollars to obtain correct cap rate information.

Brent Coombs · Answer

@Bob Bowling, that was a rather long-winded way of saying the same as @Russell Brazil ie. future cap rates are just guess work!

Actual cap rates have already occurred, and will be different every year, and will be different for every property. Cheers...

Laura Thorne · Answer

A BP article recommended that a good cap rate is one of the two strongest predictors of a good deal (that and ROI) and should be thoroughly researched.  @billgulley, you disagree because the cap rate for the seller was determined by what he bought the property for?  Is that why this is historical? I want to do my numbers right, but I also don't want to waste any precious time if a number isn't meaningful!

Bill Gulley · Answer

Brian makes a good point!

However, you do understand that a cap rate is historical and not an indicator of what your cap rate will be, right?

Look at the price, your numbers from your conservative pro-forma, the better your estimates the better your expectations.  An owner's claimed cap rate is pure marketing and it won't be the same two years in a row, why even look at it?!  :)

How do you find cap rates in an area?

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