On the very first day of Business School in Finance, the first thing that is taught is TINSTAAFL (There is no such thing as a free lunch.) That is probably the most important thing you learn and much of finance then builds on this concept. So, if something sounds too good to be true, it probably is not true. To be sure, there have been times where this skepticism has prevented me from trying some things that ultimately became lucrative but more often it has prevented me from getting involved with things that didn’t pan out.
In today’s business environment, we are seeing interest rates paid by financial institutions of 1% or 2%. The 30 year mortgage rate now is just a little more than 4%. Yet in Commercial Real Estate, we see cap rates being quoted at 10% to 12% for Commercial Investment Properties. So, one has to wonder, why isn’t this a slam dunk? Why isn’t money pouring into these investments? After all, if this is true, this seems like a license to print money.
In some cases, money is flowing toward these investments but before putting your life savings into one of these investments, refer to the opening paragraph – There is no such thing as a free lunch. In many cases, these deals simply are too good to be true. Understanding Investment Property and the way that these cap rates are figured is crucial to your decision to invest. Continue Reading
