What is a cap rate? Simply put, a cap rate is the expected rate of return given certain assumptions about a real estate investment property. The cap rate is calculated by dividing the property’s net operating income by the current market value. When real estate valuations rise, cap rates fall, and vice versa.
US Treasury bonds are government debt instruments issued by the US Department of the Treasury to finance government spending. Treasury bonds are generally considered “risk-free” because they are backed by the US government.
The difference between the yields on Treasury bonds and cap rates is the spread or the difference in returns an investor expects from an investment in commercial real estate over risk-free Treasury bonds.
During the last few years, cap rates have steadily declined across most sectors due to increasing property values. In the local market (Los Angeles), multifamily cap rates have been around 3.5-4% on average, which is low by historical standards.
Will cap rates rise? If you believe property values are or will decline (which seems to be the case), then cap rates should rise. Sellers, however, do not like to reduce their prices but they may be forced to do so due to the current economic conditions.
Is it a good time to buy or sell? Well, it depends. Cap rates and sales prices are only two of the many factors that investors consider when deciding whether to purchase a property.
If you are looking for someone to help you navigate through this process, do not hesitate to call (818)636-6397 and I will be glad to help.
By Alen Aydinian, DRE #01893917 | (818)636-6397
* this article is intended for informational purposes only. Consult with a professional for your individual needs.