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Lower cap rate apartment buildings

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EricCaTo | 05 Jan 2017, 12:30 AM Agree 0

I would like an opinion about the low cap rate apartment buildings. So.... if you come to a place like Toronto and you get into an A+ location you are expected to get somewhere around 3% cap rate only (as I understand, the same rough number would be in other major cities in the US like NY while in other suburbs cap rates can be 6-12%).

So going back to Toronto... here is the full picture:
1) cap rate 3% only
2) interest rate almost 3% [so there is no real spread between cap and interest rate, meaning the buyer won't make money on the borrowed funds]
3) rental values are raising at only 2% per year WHILE the property expenses raise in a much higher rate!

SO, the question is, IF interest rates are so low and they got no lower place to go so it could only go higher or stay the same.... and IF, even if rates stay the same, the expenses raise faster than rent increase, then WHY would someone buy it? Assuming there are no major upsides to the property and strictly 3% cap rate --- how can one expect to make money? Return is SO LOW plus all the other factors are maxed out and working against you ---- so much questions are (1) HOW do people profit on this kind of investment (2) HOW are these investment are even possible to appreciate in value even over the next 10year-period - I just dont see a way..... and the craziest thing about it.... SO many buyers and no sellers. Something I am still trying to wrap my head around and understand.

Your insight will be much appreciated.

Thank you!!!
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