NetGain believes the differences in investment characteristics between bonds and income property are sufficiently significant to negate any useful comparisons. With two exceptions, NetGain doesn’t use the bond market for analytical comparisons between bonds and income property. The two exceptions are:

1. Triple net leases with a single tenant: This is not a real estate transaction. This is a credit arrangement with many similarities to a bond. The markets recognize this and adjust the value of the property accordingly to the changing interest rates.
2. Bond premium to capitalization rate: The bond rate yield premium can result from high yields and/or low capitalization rates. Two hundred basis points would be a very bare minimum to consider any analysis. The result of a premium could be a return on investment from the bond that is higher than the property. This is a viable analysis when the holding periods are minimally five-to-seven years, and the rating of the bond is comparable to a subjective rating of the property.

For investment purposes, NetGain believes the capitalization rate serves two critical functions.

1. As a general rule, NetGain doesn’t believe in negative spread (when the debt service APR exceeds the capitalization rate). As covered in NetGain’s essay“Three Strikes and You’re Out, The Real Estate Version,” the result of negative spread is a guaranteed loss when you borrow, and the more you borrow, the more you lose.
2. When utilizing a philosophy that encompasses a positive spread, the capitalization rate identifies what your minimum APR should be. The amount of the capitalization rate’s premium over the APR will determine what your leverage should be. Additionally, getting an accurate capitalization rate forces you to find the real operating expenses and the real income. This is vital for establishing an accurate baseline from which to make your future projections.