Compressed Cap Rates

One of the most widely used metrics by real estate investors is the capitalization rate or cap rate. The cap rate is a useful tool to compare market pricing across markets and sectors, and it can serve as a base for real estate investment decisions. In the simplest sense, a cap rate is a yield generated by property or group of properties. Mathematically, it's the net operating income (rents minus expenses), or "NOI," expressed as a percentage of a property's value.

Many investors use the calculation to determine how well their money is working for them. If the income remains the same while the property value has increased, the cap rate lowers. Conversely, increased revenue or smaller operating costs would increase the cap rate.

The low-interest-rate environment, combined with limited real estate inventory, has driven many property values higher. In turn, most cap rates have decreased. Some savvy investors are using a 1031 exchange to reposition assets into higher cap rate properties. Replacement properties might be in a nearby city or even a different asset class; more importantly, the investor's yield is higher.

Your opportunity to lock in higher property value is today. While doing so, you can also let your money work harder by transitioning to higher-yielding property(ties). Advantage Wealth Solutions Exchange can help you navigate the tax strategy to keep more of your money working for you.