Cap Rate Is Over – Rated When Evaluating Triple Net Lease Properties

Feb 27, 2014

Eighty percent of investors who call Westwood Net Lease Advisors about making a property investment start the conversation by inquiring about the capitalization rate (a.k.a. cap rate) they desire in a property. While the cap rate for a property can indeed be a predictor of its future worth, it is important to realize that cap rate is a guideline and not the sole determining factor of whether an investor should buy one commercial real estate property and not another.

cap rate


The cap rate of a property is a popular measure of its value for two reasons:

  • The concept of cap rate is easy to grasp (i.e., the ratio between the net operating income of a property and its capital cost).
  • A property’s historical cap rate is easy to extrapolate to predict its future income.

Even so, it is important to consider other factors that are just as indicative of a property’s worth.

The following components are also essential to examine before investing in a property.

  • Rent per square foot (is the rent high, low, or average for the area?)
  • Average annual population growth of the 1-5 mile radius surrounding the property
  • Average household income for the 1-5 mile radius surrounding the property
  • Tax incentives provided by the city or state in which the property is located
  • Quality of neighboring tenants (e.g., big box retailers versus small businesses)
  • Location in relation to major streets and intersections
  • Internal rate of return (IRR) based on your tax bracket and deprecation benefits
  • Ability of the tenant to gain a long-term, low-interest loan

The cap rate of a property is important for predicting its value, but it is essential for investors to see cap rate as what it is: one of many factors that help investors and property brokers determine the prospective value of a property.

Note: Before you move forward with a real estate investment, it is recommended that you hire a real estate attorney and a CPA to oversee the legal and financial aspects of the deal. Having these professionals on your side will help you complete the transaction in an accurate, timely manner.

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