What is CAP Rate? The number one question I get asked is, “What CAP rate do you buy?” but this is the wrong question. One piece of data doesn’t substantiate a deal. Don’t get locked into one term. All the pieces of data matter. You need to feel the deal, meaning, do you want to actually do the deal?
The lower the CAP rate the higher I can sell it for. What’s a good CAP rate? It depends. I would have made a fortune in San Diego 20 years ago buying extremely low CAP rate properties. Think about the whole deal, like how you will exit, not just the current CAP rate. There is a number more important than the CAP rate: 1.25
That’s the Debt Coverage Ratio you want. You want the NOI bigger than the debt—you want a minimum 25% more income than debt.
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