Cap Rates - August, 2014
The opening line to every conversation regarding income properties tends to be “what is the cap rate?” Short for capitalization rate, a cap rate is specifically defined as net operating income divided by sales price. As an example, a property that is producing $70,000 in annual net income, and is available for $1 million is being offered at a “7 cap”. A cap rate does not take leverage into consideration.
Due to the still low interest rate environment we are experiencing, cap rates are fairly low at this point.
Lower risk investments such as high credit single-tenant long term net leases are achieving caps of approximately 5% at this time. Stable multitenant retail and office properties are generally seeking 6 – 7%, while properties of slightly higher risk might go for closer to an 8 cap. Logically, cap rates tend to move along with interest rates. Accordingly, it appears to be a favorable time for property owners to sell for high prices due to the low cap rate environment.