NetGain provides national cap rate recommendations via its Nation Income Property Index (NIPI). There are times when local markets exhibit numbers that exceed the recommended rate. The foundations for NIPI are predicated on avoiding negative spread, the economic outlook (using the Consumer Confidence Index), and the current unemployment rate. Those components are factored into a weighted and proprietary formula and the result is a recommended capitalization rate. It is important to note that NIPI is based on national numbers and the recommended cap rate should be used as a guideline.

Much higher numbers than the recommended cap rate could suggest certain characteristics. Higher yields are usually commensurate with higher risks. Higher risks associated with income properties are often the result of the following:

• Weaker than average economy.
• Older and less efficient and/or attractive buildings.
• Lease rollover cost.
• Lower rent on lease rollover.
• Anticipated capital improvement costs.
• Anticipated vacancy.
• Operating expenses increasing faster than income increases (NOI squeeze).
• Negative legislative environment.

For situations where local market cap rates are lower than national recommendations, please refer to Is 5% a Safe Cap Rate?