Commercial Investment Valuations are typically presented as cap rate driven: the lower the cap rates, the higher the price. Investors have the challenge of balancing asset security and safety vs. an acceptable Cap Rate return.
Security and safety include a matrix of attributes: Extended Lease Term, Quality Tenant with good credit history (and track record of business acumen), LOCATION (both the immediate demographics and street/area positioning), a favorable NNN lease, long term appreciation aspects, and financing desirability. However; how low can you go? Cap rates in desirable urban settings wafting in under 4% need a compelling story to convince me.
REMEMBER the OLD Adage: “It’s not what you make; it’s how much you keep.”
Evaluating your cash on cash return is as important, if not more important than a cap rate. If your investment is predicated on a 4% cap rate but the cost of the funds is above that, you are going backwards. It can make sense if you are going into a Value-Added Property, or compelling project that offers an opportunity to increase the income to the current market conditions. No one size fits all but sometimes “all that glitters isn’t gold.”