As previously discussed in an older blog post, cap rates are important when looking at any new deal. If you’ve been in the hunt for deals recently, you will notice that cap rates are extremely low right now. Everywhere.
There is no other way to spin it.
But Why?
In this post, I will outline the three main reasons why people are OK paying such premiums for Real Estate in the market.
- Capital is as cheap as it’s ever been
Not to make this too confusing for those reading this who don’t comprehend the banking system, but because borrowers can borrow money for their real estate deals at such low interest rates, they are more than happy to make their 5-6 percent return when they only had to pay 2-3 percent interest on the money borrowed. What this means is that they took money and leveraged that for an asset that earns them enough money to pay back the lender, and have cash flow left over after, which is their profit.
- Real Estate is hedge against inflation
Given the inflation rate today is close to 7%, the value of your dollar decreases every day it is not being invested in something that returns the same rate of return. Therefore ,people are storing their cash in assets, like Real Estate, simply because the returns are stronger than the ones being offered by the banks or other forms of investments like bonds/stocks.
- More popularity with Real Estate as a whole
Something I’ve noticed is how many more people want to get involved in Real Estate. Especially given the times we experciend with COVID, people value their time and freedom more than ever. As a result, people are flocking to real estate investments to create the passive income that will allow them to earn their time back, which is the most important asset we have. With more buyers looking for deals, naturally the supply chain will dry up, forcing prices up.
If you are interested in learning more, please feel free to email me to chat!