Cap Rate is an investment tool for analysis that enables an investor to compare one investment to another. The investment creates “net income” and that is the important factor……what leverage an investor chooses to utilize is a totally different decision.
Using Cap Rate I can compare an investment in real estate to a CD at Bank of America or Dividends earned in the stock market. The degree of risk always increases the cap rate.
Always check the itemization of expenses. Many, if not most of the time the expenses will be understated. Understated expenses overstates net income, thus overstating value.
On a newer building in a stable area, expenses should be 32 to 35%. On an older building in a management intensive area, expenses can run as high at 60%.