Real Estate Investment Basics – Cap Rates

Are you an investor who is looking to invest in commercial real estate? Have you heard or seen the phrase “cap rates” and wondered what they are?

Cap rates are one of the tools real estate investors use to determine the potential return on their investment.

We’ll examine what cap rates are, why they are important to investors, and why investing in real estate can be easier today than ever.

Introduction to Cap Rates

For commercial real estate investors, the Capitalization Rate (Cap Rate) is one of the most important metrics when evaluating properties.   

Cap rates are used in commercial real estate as an indicator of the expected rate of return by a real estate investment property. The cap rate is calculated by taking a property’s projected net operating income (NOI) and dividing it by the current market value of the property and is expressed as a percentage.

In addition, the cap rate is beneficial when comparing the relative value of similar real estate investments. 

Factors That Influence Cap Rates

While the cap rate can strongly influence your investment decision, multiple factors impact a deal’s cap rate.

Typical Factors That Impact Cap Rates:

  • Market Size
  • Capital Liquidity
  • Location
  • Growth Potential
  • Stability of Assets

Understanding Liquidity

In finance, liquidity refers to how easy it is to sell a security, an interest, or an asset without changing its market price.

The higher the liquidity of an asset, the more quickly the asset can be converted to cash for the expected market price or value.

There are two principal ways liquidity is measured: market liquidity and accounting liquidity.

Market Liquidity

Market liquidity measures how efficiently a market allows assets to be bought and sold at transparent, stable prices.

Accounting Liquidity

Accounting liquidity describes how easily a company can meet its financial obligations as they come due with the assets available to them. 

Apartment Building

The SecondRE Marketplace

Accredited and real estate investors can use cap rates to help find, buy, and sell cash-generating commercial and residential properties on the SecondRE Marketplace.

SecondRE partners with Sponsors to choose qualified assets and make the asset and its performance information, like its cap rate, available on the Marketplace.

Primary vs. Secondary Properties

Property markets are typically divided into two categories: primary and secondary.

Primary Properties

Primary properties are new properties, including ongoing projects and new launches from a developer. Because primary properties are new, investors will spend less on refurbishments and renovations.  

Secondary Properties

Secondary properties are properties that have already been introduced to the market for rental or are owner-occupied. 

Secondary properties often come with lower financial risk because the investors can analyze ongoing data such as the cap rates of a building and compare it to other similar buildings.   

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Investment Options

The SecondRE Marketplace offers investment options for Accredited Investors, Real Estate Investors, and Sponsors.

Accredited Investors

The SecondRE Marketplace allows accredited investors to access secondary opportunities and buy percentages of real estate investments at affordable prices.

Real Estate Investors

For real estate investors looking to get out of a real estate investment, SecondRE’s Marketplace lets you sell all, or part of your investment, at the price you want, with the blessing of your sponsor.

Real Estate Sponsors

Sponsors can use the SecondRE Marketplace to provide liquidity for current and future properties by allowing investors to get in and get out of deals more quickly.  

Modern Office Building

Real Estate Sponsorship

In commercial real estate, the sponsor is the company or individual that finds, acquires, and manages a property on behalf of the equity partners.

Real estate sponsors are critical players in any large commercial real estate deal because they manage and oversee every aspect of the deal from inception to completion. 

Real Estate Sponsor Roles and Responsibilities:

  • Identify Great Real Estate Investment Opportunities 
  • Generate and Underwrite Financial Projections for the Property 
  • Deal With Sellers 
  • Deal With Lenders 
  • Deal with Tenants 
  • Perform Financial and Physical Due Diligence on the Property 
  • Provide Personal Guarantees / Obtain Mortgage on the Property 
  • Run/Manage Day-to-Day Operations of the Property 
  • Find, Obtain, and Retain New Investors in the Property  

This list is only a portion of real estate sponsors’ roles when pulling together real estate properties’ investors.

Stability in Real Estate

One of the things that investors love about investing in real estate is its stability even in tough economic times.  

The following are the major segments of commercial real estate: Retail, Industrial, Office, Hospitality and Multi-Family. Commercial real estate can provide rental income and also the potential for capital appreciation for their investors. 

With the different property types, commercial real estate investors can take advantage of economic upturns in one sector while another sector struggles. For example, as the pandemic shut down many corporate office spaces, the industrial sector boomed as the demand for warehouse and distribution spaces soared. 

Thanks to monthly rent, commercial real estate also can produce regular and predictable cash flow that can provide investors with much-needed liquidity. 

Commercial real estate also provides a hedge against inflation, as inflation also drives up the demand for rental real estate as well as increase rent prices. 

Well-selected real estate investments can give investors predictable cash flow, tax advantages, outstanding returns, and the ability to diversify.

Current Housing Demands

According to the S&P CoreLogic Case-Shiller Index, the cost of a single-family home jumped more than 20% across the country in April 2022 over April 2021.

According to the Mortgage Banker Association, these higher costs are also pressure the housing market as mortgage applications continue to fall.

This data ties directly into a report by JP Morgan, which stated that “multi-family housing remains strong” as rising mortgage rates and prices are forcing people to rent for more extended periods.

The same report also says that “workforce housing could be an investment opportunity” as a massive housing shortage combined with a steep rise in rent, forcing workers to look for new, affordable housing.

Sky high prices, insatiable demand, rising interest rates, and increased rents are resulting in the need for new multi-family housing developments across the country. 

SecondRE and Cap Rates

The SecondRE Marketplace gives real estate investors a new way to buy and sell holdings in commercial properties. Using cap rates is one of the most popular methods for real estate investors to look at an investment property and see how it compares to other similar properties. 

SecondRE brings together accredited investors, real estate investors, and sponsors in one place to help provide liquidity for commercial real estate investments.  

Are you ready to gain access to the SecondRE Marketplace? Click Here to Create an Account and Get Started Today!


SecondRE - Liquidity for Real Estate

We’re SecondRE

SecondRE partners with sponsors to enable liquidity for their investors.

SecondRE Marketplace enables investors to buy and sell holdings in residential and commercial real estate properties, with the sponsors’ blessing.

By enabling liquidity, sponsors find it easier to attract new investors.

SecondRE Inc. is an American company led by seasoned technology and real-estate entrepreneurs, who have scaled operations all the way to NASDAQ

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