I like your answer to this question. Short, clear.
I think that we could add that the cap rate is only a measure of the cashflow, relative to the purchase price of the property. But the quality of the deal may depend upon more than that. The second economic benefits of owning rental properties are the potential appreciation – and you mention that. The third economic benefit is the tax savings. You don’t mention that. But these days, the tax savings probably don’t vary a lot from property to property, so it is probably not as important in evaluating a property.
You mention the work required to manage a property. I hadn’t expected that as part of your answer so was pleasantly surprised. I think you have pointed out an important variable in what makes a property a good deal.
It seems to me that the question really could be rephrased to be: what is a good investment? Then the cap rate becomes less important in the decision-making about what property to own.
Then there are a lot of other variables to consider: style of property, age of property, location–especially conviently near or not, the types of renters, and many more.
Under the normal condition, what is the minimum cap rate you would consider a good investment? My realtor told me to get above 9%. But one post here suggest a cap rate of 12%. I am sure 12% is much better than 9%. but is this realistic? Who is closer to the truth.
CAP rates will vary from mkt to mkt, just like property values will vary with each neighborhood. What may be a good CAP in one area at 9, is a lousy CAP at 12 elsewhere. Kind of like saying; what is a 3/1 SFH worth? Well, you know the broad range of answers to that one.
Just a few things that go into evaluating an acceptable CAP on an investment, are potential upside appreciation on the investment and degree of management difficulty. eg. If you had a property that was expected to appreciate 25% yr., in the next few yrs., then a CAP of 8 might be great. If you had a property where the time involved in managing the property was sustantial, a CAP of 15 may be warranted, to produce a suitable return.
Hope this helps. Additionally, I wouldn’t place much stock in what a Realtor had to say about a CAP rate.