Cap Rates: They Have Their Place
Here’s the scenario. You have money you want to invest, and you do not want to manage real estate, but you want an income stream. When considering your options, you find the following: U.S. Treasury bond—2.3 percent return with virtually no risk; Municipal bond—4.5 percent return (with some tax benefits), still with minimal risk; and McDonald’s ground lease—5 to 5.5 percent return, with a slightly higher risk and illiquidity. These examples demonstrate very low risk situations, but make a comparison between similar investment options. So, where do Cap Rates (short for capitalization rates) come in? Cap rates are the benchmark that enable investors to compare various investments. Here’s a straight forward definition: “A cap rate measures a property’s natural rate of return for a single year without taking into account debt on the asset, making it easy to compare the relative value of one property to another.” In most basic
