What's a "Good Enough" Cap Rate and Cash on Cash Return?

Commercial Investing
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I've been looking at some buy-and-hold commercial properties this past week, as a place to park some cash and create some passive(ish) cash flow.

Not surprisingly, there aren't a ton of "screaming deals" out there in the open market of listed properties. The margins are pretty thin and the normal metrics I look at (cash on cash return, cap rate, ROI, IRR, etc), when I run them against each property's asking price, don't look amazing. They either won't make any money or they'll lose money like crazy from day one

It's gotten me to thinking... what makes a property "good enough" to purchase?

I realize the answer is pretty subjective and depends on the individual investor's goals - but even so... is there an obvious point at which ANY property is considered a great deal vs. an average deal vs. a terrible deal? If so, where are those lines?

Personally, when I run the numbers on a deal, I like to see a cap rate and cash on cash return of at least 10% or higher, but that's not an easy thing to find right now unless you're finding off-market deals and/or making offers WAY below the asking price. Not to mention, there are cases when these metrics can reasonably fluctuate higher or lower depending on the property. For example, if the location is particularly good, or the tenant is strong (in a triple net lease situation), that can be a decent reason to accept a lower cap rate, simply because the property provides more security in other ways.

Anyway - for those buy-and-hold investors out there, what do you consider a "good enough" cap rate, cash on cash return, ROI and IRR? And if there are any other critically important ratios or numbers you look at, what are they, and what do they need to be for you to say "YES!" to a deal?

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@retipsterseth I think it depends on your goals and the level of risk you can tolerate. It also depends on if you have any unfair advantages as an investor.

For example - some investors may specialize in construction, so it's easy for them to expand or improve a run down property, whereas it would be more risky and expensive for you to do this if you don't specialize in this kind of thing.

I'm with you on the 10% or higher CoC and cap rate, though. I would be happy with those numbers, as long as everything else about the deal checks out.

Some investors may also be coming at it from a much different angle than you. If there's a giant REIT fund buying up properties in your area, they may be willing and able to risk more, hold the deal for longer or make improvements to the property - or even the neighborhood - on a larger scale than you can even think about. This kind of thing makes it harder for the little guys to thrive, because they simply can't compete with the kind of money that a REIT can throw around.

1 Like
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I think Seanjean is right it totally depends on your goal