When Paying a Higher Cap Rate Than Your Debt Actually Makes Sense

Most people in commercial real estate run for the hills if the cap rate is lower than the cost of debt. The logic is simple: why would you ever buy at a 5.5% cap rate if your debt is sitting at 6%? Isn’t that a losing game?

Not necessarily.

This is where true investors separate from the hobbyists.

If you’re looking at a property with a 5.5% cap rate and debt costs you 6%, the surface numbers don’t look great. But let me ask you:

Is it in a high-growth area?

What do comparable per-door sales look like?

Are you positioned to hold and let the market catch up?

Because sometimes, it’s not just about the spread today — it’s about the value tomorrow.

Understanding the Play

When you’re investing in a prime location, you’re not just buying its current cash flow; you’re buying its future appreciation. You’re betting on the long game. If the neighborhood is trending upward, rents are rising, and infrastructure is being built out, that 5.5% cap rate starts to look like the smartest move you ever made.

It’s the difference between flipping for cash and holding for wealth.

Slum lords cut corners and neglect improvements just to survive.

True investors watch the market, maintain their properties, and wait for the tide to rise.

Avoid the "Slum Lord" Trap: Know Your Capital Stack

If you don’t understand your capital stack, you’re setting yourself up for struggle.

Senior Debt — Can you sustain it if interest rates rise?

Mezzanine Financing — Are you over-leveraged?

Equity Stakes — Do you have enough skin in the game to ride out volatility?

The right structure lets you maintain capital improvements and avoid the corner-cutting mentality. The wrong one? That’s how slum lords are born.

Underwrite with Realism, Not Optimism

Here’s the thing: right now, underwriting based on rental increases is a dangerous gamble. Markets are shifting, and banking on constant rent growth is a risky game.

Instead, focus on:

Concessions and Stress Tests: Run the numbers as if rent growth is stagnant. Can the deal still cash flow? Can it weather a downturn?

Expense Projections: Are you factoring in rising costs for materials, labor, and maintenance?

Exit Strategies: Is your capital stack built to pivot if the market shifts?

Underwriting with conservative estimates protects you from desperation-driven decisions. You don’t want to be the landlord begging for rent hikes to stay afloat.

Real Investors Watch the Right Metrics

To make these decisions with confidence, you’ve got to watch the 5, 7, and 10-year Treasuries, study per-door sales, and understand your debt-to-income ratios. These aren’t just numbers; they’re the signposts that tell you whether your deal is built for short-term cash or long-term wealth.

What’s your take?

Would you buy at a 5.5% cap rate with 6% debt if the market fundamentals were right?

Do you underwrite with stress tests or gamble on rental increases?

Drop your thoughts below — let’s share strategies and insights. This is how we grow.

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