Cap Rates vs. Risk For Your 1031 Exchange



by Rusty Tweed, President & Owner of TFS Properties, Inc.

In this video, we’re going to be talking about the relationship between Risk and Cap Rates. Just like with any investment, the higher the risk, the higher the return; the lower the risk, the lower the return. You’re going to find that the risk varies quite a bit depending on the area in which you buy your property; for example, here in Los Angeles, Santa Monica is considered very low risk area. If you buy an apartment over there, it’ll probably pay around a 3% Cap Rate. Now if you move over into the San Gabriel Valley, which is considered a higher risk, you’re probably looking at a 4%, maybe 5% Cap Rate. Now if you go down to South LA, which is considered a much higher risk area, you’re probably looking at 6-7% Cap Rates. Again, the higher the risk, the higher the reward; the lower the risk, the lower the reward.

Now let’s talk about cap rates according to different parts of the country. Let’s take Starbucks for example. This is actually a property we tried to buy for a client recently down in Orange County, which is a very strong affluent area. This came in at a 3.75% cap rate, which is low. Now if you move over to somewhere like Kansas, which is considered a little higher risk, you’re going to see a 5% cap rate. Moving over to Jacksonville, Florida, that same Starbucks is now at a 5.5% cap rate. If we move over to Indianapolis, you’re going to see a 6.5% cap rate.

Again, all these are very similar properties; they’re all Starbucks, but according to what part of the country they’re in and what kind of risk is in that area, we’re going to see a different cap rate.

Now, let’s talk about cap rates according to different types of property. For example, if you take a NNN Lease property like a Walgreen’s, which is considered very very low risk, you’ll have a low cap rate, let’s say 6%. If you go to an apartment building, which is considered a higher risk than a NNN Lease and you’ll get something like a 7% cap rate. Going to something like an office building, which is considered one of the riskier types of investment in real estate, you’re going to get again a higher cap rate, in this case, perhaps 8%.

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Cap Rates vs. Risk For Your 1031 Exchange

by Rusty Tweed, President & Owner of TFS Properties, Inc.



In this video, we're going to be talking about the relationship between Risk and Cap Rates. Just like with any investment, the higher the risk, the higher the return; the lower the risk, the lower the return. You're going to find that the risk varies quite a bit depending on the area in which you buy your property; for example, here in Los Angeles, Santa Monica is considered very low risk area. If you buy an apartment over there, it'll probably pay around a 3% Cap Rate. Now if you move over into the San Gabriel Valley, which is considered a higher risk, you're probably looking at a 4%, maybe 5% Cap Rate. Now if you go down to South LA, which is considered a much higher risk area, you're probably looking at 6-7% Cap Rates. Again, the higher the risk, the higher the reward; the lower the risk, the lower the reward.



Now let's talk about cap rates according to different parts of the country. Let's take Starbucks for example. This is actually a property we tried to buy for a client recently down in Orange County, which is a very strong affluent area. This came in at a 3.75% cap rate, which is low. Now if you move over to somewhere like Kansas, which is considered a little higher risk, you're going to see a 5% cap rate. Moving over to Jacksonville, Florida, that same Starbucks is now at a 5.5% cap rate. If we move over to Indianapolis, you're going to see a 6.5% cap rate.



Again, all these are very similar properties; they're all Starbucks, but according to what part of the country they're in and what kind of risk is in that area, we're going to see a different cap rate.



Now, let's talk about cap rates according to different types of property. For example, if you take a NNN Lease property like a Walgreen's, which is considered very very low risk, you'll have a low cap rate, let's say 6%. If you go to an apartment building, which is considered a higher risk than a NNN Lease and you'll get something like a 7% cap rate. Going to something like an office building, which is considered one of the riskier types of investment in real estate, you're going to get again a higher cap rate, in this case, perhaps 8%.