Should I rely on Cap Rate to buy my properties?
Very often you will hear real estate agents and at times real estate investors recommend that you purchase properties based on a Cap Rate. Should you make an offer to purchase by simply multiplying the valuation and obtaining a purchase price?
Absolutely not! The first challenge that I have about using a Cap Rate as an indicator of value, is the fact that 99% of the time the information that is used to calculate the and oh why is wrong!
We know and understand that the calculation to obtain a Cap Rate is NOI divided by purchase price. Therefore if the vendor or the real estate agent omits to include some expenses in its calculation of NOI, the calculation of Cap Rate is false.
I have even seen real estate agents that created their own version of Cap Rates to make their listings look better.