What a Cap Rate Is NOT

Generally, the first question we ask about a prospective deal is: “What’s the cap rate?” The reason being we want a general understanding of value. Emphasis on the word “general.” A cap rate is only one piece to a very complex puzzle. It is the unleveraged yield on a given investment (Net Operating Income / Purchase Price) – an important puzzle piece indeed! But can you solve the puzzle from just that one piece? Not even close.

A cap rate is a measure of today’s cash flow – it says nothing of the future cash flow potential. Investors must independently determine the sustainability and predictability of those cash flows. If you’re looking for a steady dividend, you’ve got to look beyond the cap rate.

A cap rate is based only on current property fundamentals – it says nothing of how those fundamentals may change over time and how they stack up relative to competitive properties. These are key indicators that should inform any investment underwriting.

A cap rate tells you nothing of the location. If it seems like a low cap rate, then perhaps the property is well-located. But then again, maybe it’s poorly-located but leased to strong credit tenants, or the tenants are on long term leases, or the property can be profitably re-positioned into a different property type altogether. Point is, you can’t necessarily surmise a property’s geographic desirability based on cap rate alone.

Clearly, there are many factors besides the cap rate that determine an investment’s attractiveness. Investors are simply unable to rely on just the cap rate. The trick is to put as many due diligence pieces together as possible in order to analyze the whole picture. A thorough analysis – beyond just the cap rate – leads to a non-investment more often than not. In fact, Streitwise probably spends just as much time analyzing deals that we end up NOT doing, simply as a result of the number of investments that don’t meet our criteria. But doing the dirty work on every deal is an important part of the investment process.

See related articles:
What is a Cap Rate?
What is a Cap Rate… Truly?

Jeffrey Karsh

SW Manager, LLC (“Manager”) is a wholly-owned subsidiary of and controlled by Tryperion Holdings, LLC (our “Sponsor”). Manager is the external manager and advisor of 1st Streit Office Inc. (“1st Streit Office”) and 1st Streit Office Operating Partnership LP (our “Operating Partnership” and, together with 1st Streit Office, “Our Current Offering”). 1st Streit Office is the sole general partner of our Operating Partnership, through which all of our assets will be owned and substantially all of our operations will be conducted. All references herein to “Streitwise” refer, as applicable, to Manager, 1st Streit Office, the Operating Partnership, or any of their affiliates (collectively, the “Streitwise Entities”). Unless explicitly stated to the contrary, all references to “we,” “us,” and/or “our” shall refer to the Streitwise Entities. By using Streitwise, you accept our Terms of Service and Privacy Policy.

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Performance: Past performance is not a guarantee of future results. All historical returns, target returns, or hypothetical projections may not reflect actual future performance.
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¹ Dividends & returns: Current annualized dividend based on the most recent dividend declaration as of the quarter ending 9/30/2024. Dividend return calculations based on NAV at the time of dividend return. 3Q24 dividend payout of $0.13/share equates to a 7.2% dividend based on the current NAV. The REIT has averaged a 7.2% annualized dividend yield since 2020 and a 8.3% annualized dividend yield since 2017 based on the average NAV for the respective periods. See Quarterly Report for all returns history.
² Source: FTSE NAREIT All Equity REITs vs S&P 500.
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What a Cap Rate Is NOT

Better Understanding the Cap Rate Concept