Monday, October 5, 2009

Cap rate spreads - making sense?

I really like this analysis by David Lynn posted at NREI. Why? Because it makes sense to me.

At one point, the numbers were insane. People buying deals at a 4 cap with the unfounded expectation that the bubble would go on and on and on smelled of tulips in Rotterdam. And yes, the frost came.

But look at the charts now, if you happen to be a chart person. Add in your risk premium and real estate is slowly starting to make sense again. Buy at a 10, sell at a 8 is the maxim I have mentioned here before. And as the caps reach reasonable levels, real estate's making sense again. That is the beauty of cycles. The thing is - it could still get better. But I agree with the analysis that smart money will start jumping in again with relatively "safe" deals - reasonable interest rates, LTVs and expectations.

 
-