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Thursday, February 14, 2013

What is Cap Rate?

2:10 PM
Happy Valentine's Day! Sam Sant from Pasadena, California introduced himself to me on the NAREIA cruise after the presentation on multifamily investing by Anthony Chara. “I have the PhD of cap rates,” Sam told me, in response to my questions about fluctuations in cap rates in the Seattle area. Here are the five items that Sam explained affect capitalization rates: 1) Interest Rates: the higher the interest rate, the higher the cap rate. 2) Risk of Income: A “C” property has a higher cap rate than a “B” property, because of the higher risk. 3) Supply and Demand of Properties: the more demand for properties, and the more limited the supply, the lower the cap rate will be. 4) General Investment Environment: Other investment opportunities (such as the stock market) are paying more, then the higher the cap rate required to entice investors; and 5) Future Growth in Rents: the higher the expected rent growth, the lower the cap rate.

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