We aren’t in bed with anyone at all and we love to meet competent professionals. Give us a call at 781-507-9507 I’m at extension 1.

I just wanted to say that this is a great article. I am so glad that the subject of cost segregation is being talk about more often and more frequently; then just us engineering firms that are in the business of providing these studies, so thanks.

I do have a question for you Brecht. Do you actively have a firm or firms that you or your group are working with in your area? If you are or are not, I would like to speak with you on this subject and see if we can put something on the table for you and your group.

I look forward to hearing from you.

Sincerely,

Eric C.

Great questions.

Yes cap rates and prices are inversely proportional so the lower a cap rate goes the more money one would have to pay for the property. Cap rates are driven by the market. Buyers look to buy higher cap rates sellers look to sell at lower cap rates.

The simple answer to A or B is clearly you would buy B if you could. However! B might be a rooming house on the tough side of town while A is an office building off the highway, this changes the equation. That is how cap rates point to an indication of both the risk, upside potential and management associated with a specific investment.

Suppose you have a 20 Unit Multifamily throwing off $200,000 NOI and that building is in downtown Boston an investor might pay a 6.5% Cap for that income in that location while if it was in Worcester they might pay a 9% Cap and in Lewiston Maine a 14% cap. So the income that is worth $3.3M in Boston is worth only $1.43M in Maine. That’s because values are not solely determined by net income today. Future appreciation (the exit cap), perceived risk/hassle/management, and other factors impact cap rates.

Debt service speaks more to the particular investor than the property. I had a guy pay all cash for a 6 unit recently because he is extremely debt averse, another who put down 25% on a nearly identical property. Debt service should be evaluated as it impacts a particular investor’s Return On Equity goals but to include debt service in a calculation that is used as a benchmark of performance for a particular building doesn’t work.

Cash flow is linked to debt service so again, it won’t tell the same story as a cap rate.

IRR allows an investor to consider everything that you mention.

About the Gross Rent Multiplier
Expenses can swing wildly even between similar buildings. Commercial buildings can have gross or modified gross leases that eat up the NET, multifamilies can have the heat included or not. I recommend NOT trying to use the GRM, it provides only a very broad, general look. NET is where it’s at.

A question for you:
You can buy a CVS with a 25 year NNN lease at a 5.9% cap, an office building at a 9% cap, and a rooming house at a 19% cap. All of these investments are in the same town.

Which one is the best investment?

Thanks for the article. I have a question about the inverse relationship between cap rates and property values. Generally, as the cap rate goes down the price of the property value goes up, right?

The cap rate equation is NOI / purchase price. If 2 identical properties are compared below -

Property A - $100,000 NOI / $1M purchase price = 10% cap rate
Property B - $200,000 NOI / $1M purchase price = 20% cap rate

Which property is more valuable to an investor? According to cap rate logic property A is because the cap rate is lower. This does not make sense to me. Property B will have a greater return on equity. Seems that the higher the cap rate the more attractive and valuable an investment property is. I prefer purchasing property B. Am I missing something here???

What about debt service too? This should be factored into the analysis right?

Isn’t cash flow or even gross rent multiplier a better property valuation method than using cap rates?

Thanks for your thoughts.

Ronnie Frank