Posted September 12, 2022 | by Keaton Bessey, Managing Broker, Greater Vancouver Tenant & Property Management Ltd.
Let's start with answering "what is a CAP Rate?" first...
Basically, a CAP rate or “Capitalization Rate” is the net income generated by a real estate asset in comparison to the asset value. Example, a property worth $1Million today, that generates $100,000 in Net Income (dream) would be a 10% CAP Rate. The income generated on the property is 10% of the asset value (sale price), and it would take 10 years of operating the property to pay for itself in cash. This number does not factor in mortgages as those can vary by owner. This number is based on the property strictly speaking.
With the above explanation, a good cap rate depends on your desired return on capital and your risk tolerance. There are properties in less desirable areas of North America that can provide a 10-15% CAP, however, the risk is vacancy, lack of asset appreciation, poor quality tenants, etc. Generally the higher the CAP Rate, the higher the risk. In Greater Vancouver, CAP rates run from 1.5%-4% on residential property (condos, townhomes, detached homes) and can be slightly higher on Commercial Property (offices, retail, industrial) depending on what area and what class of property you're purchasing. We specialize in Residential Rental and our portfolio CAP Rate on average is 2.22% as of the date of this post. This includes full service management, one month's rent per year for repairs and maintenance, as well as one month's rent per year of vacancy, so this is a very conservative number, but its good for planning.
To answer the question, a "good" CAP rate is one that balances your expected return on capital (your money) vs. your expected amount of work and risk you're willing to take on for the return. Our clients enjoy our full service option and expect a lower cap rate to reduce the risk and the hassle.