Buying Property When Cap Rates LOWER Than Interest Rates??
Commercial real estate has long been a reliable vehicle for generating passive income, preserving wealth, and leveraging tax advantages. But what happens when the math doesn’t make sense—when cap rates fall below the interest rates you’d pay to finance a deal?
In today's high-rate environment, that's exactly what many investors are facing. With properties still trading at cap rates of 4–6% while borrowing costs sit at 7% or more, the numbers don’t pencil out as easily as they used to. For aspiring and seasoned investors alike, this raises a major question: How do you buy when the deal cash flows don’t work at face value?
Let’s break down what it means when cap rates are lower than interest rates—and five ways you can still acquire profitable commercial real estate in this tough climate.
First - What is a cap Rate?
Before diving into strategy, it’s essential to grasp this foundational concept. A cap rate, short for capitalization rate, is one of the most important tools for evaluating the potential return on a commercial property. In its simplest form, the cap rate measures a property’s annual return if you were to buy it in cash, without factoring in financing or leverage.
The calculation is straightforward:
Cap Rate = Net Operating Income (NOI) ÷ Purchase Price
Your Net Operating Income (NOI) is the property’s annual income after subtracting all operating expenses—such as property taxes, insurance, maintenance, management fees, and utilities—but before paying any mortgage or debt service.
For example, if a property is worth $1,000,000 and generates $100,000 in NOI, the cap rate is 10%. That means if you bought the property outright in cash, you’d theoretically earn a 10% return annually on your investment.
Why Cap Rates Matter
Cap rates allow investors to compare deals quickly and objectively across different properties and markets. They serve as a snapshot of risk and return. A higher cap rate generally signals a higher potential return, but it also typically comes with higher risk, such as weaker tenant credit, older buildings, or less desirable locations.
Conversely, properties with lower cap rates are viewed as more stable and lower risk, often located in core markets with strong tenant demand or backed by national credit tenants. For example:
A Class A multifamily property in downtown Austin might trade at a 4.5% cap rate.
A small retail center in a secondary market might trade at a 7.5% cap rate.
An RV park or self-storage facility in a tertiary market might reach 8–10%.
Each tells a story not just about the property, but about market sentiment, perceived stability, and investor competition.
The Relationship Between Cap Rates and Risk
Think of the cap rate as a reflection of risk tolerance and market confidence.
Lower cap rates = investors are willing to accept lower returns because they perceive the investment as safer or more predictable.
Higher cap rates = investors demand higher returns to compensate for greater uncertainty, operational challenges, or location-specific risks.
This risk-return tradeoff is one of the most important concepts to understand in commercial real estate. Two properties can produce the same NOI, but their market value—and therefore their cap rate—will differ based on how investors price in risk.
Cap Rates Are Not Static
Cap rates fluctuate based on macroeconomic trends, interest rates, and investor sentiment. When the economy is strong and credit is cheap, investors flood into real estate, bidding up prices and compressing cap rates. When interest rates rise or uncertainty enters the market, cap rates expand as buyers demand higher returns.
This dynamic is what’s happening in today’s market. Many investors are facing “cap rate compression” from years of aggressive buying, but now interest rates have climbed higher than the yields those cap rates produce. That’s what’s creating the tension between what sellers want and what buyers can afford.
The Limitations of Cap Rate
While cap rates are an excellent starting point, they’re far from the full picture. They don’t account for financing, future rent growth, or changes in expenses. Two properties with the same cap rate might have completely different risk profilesonce you consider tenant quality, lease structure, or capital expenditure needs.
For example:
A building with a long-term lease to Amazon at a 5% cap rate is very different from a mom-and-pop retail center at the same cap rate.
A newly renovated property may have less deferred maintenance and fewer surprises than an older one that needs significant capital improvements.
That’s why sophisticated investors use cap rates as a filter, not a decision-maker. They help identify which deals deserve deeper underwriting.
Understanding Market Context
Cap rates also vary widely by market and asset type. It’s not enough to look at a single property in isolation—you have to understand how that property’s cap rate compares to local and national averages.
For instance, a 6.5% cap rate might be considered a great deal in Los Angeles, but it could be average or even low in a smaller market like Chattanooga or Des Moines.
Knowing these regional benchmarks helps you determine whether you’re overpaying, buying at a discount, or capturing an above-market yield.
Putting It All Together
Ultimately, the cap rate is the baseline metric for evaluating a property’s profitability. It’s your quick, back-of-the-envelope way to ask: “Am I being compensated fairly for the risk I’m taking?”
It’s a starting point for comparing investments—not a finish line. Once you understand the story behind a cap rate—the tenants, the market, the financing, and the potential for value creation—you can begin to see where real opportunity lies.
So what happens when cap rates are lower than interest Rates?
When cap rates fall below interest rates, it signals a major shift in the financial landscape of commercial real estate. This scenario flips traditional investment logic on its head.
For years, investors enjoyed what’s called positive leverage — the ability to borrow money at a lower rate than the property’s unleveraged return (cap rate). This meant every dollar borrowed amplified returns. But when interest rates rise above cap rates, the script changes completely.
Now, instead of leverage helping your returns, it can hurt them. That’s called negative leverage, and it’s one of the biggest challenges commercial investors face in today’s environment.
Understanding Positive vs. Negative Leverage
Let’s break it down with an example:
Suppose you find a property selling at a 5% cap rate, and your bank is offering a loan at 7.5% interest.
The property’s unleveraged return (your cap rate) = 5%
The cost of borrowing (your loan interest rate) = 7.5%
You’re paying more for the debt than the property is generating in net income. In other words, each dollar you borrow is earning less than it costs you to service that debt. That’s negative leverage.
On the flip side, if your cap rate is 8% and your loan is 6%, the debt costs you less than you’re earning on the property. That’s positive leverage — every borrowed dollar helps grow your return on equity.
When interest rates are lower than cap rates, leverage works in your favor. When they’re higher, leverage works against you.
The Real-World Consequence: Compressed Margins
In a low-cap-rate, high-interest-rate environment, margins get squeezed. Investors who previously relied on debt to supercharge returns now find themselves barely breaking even — or even operating at a loss.
For example:
A property that would normally produce $5,000/month in positive cash flow at a 4% interest rate might now produce negative cash flow once debt costs rise to 7–8%.
Properties that used to attract dozens of offers are sitting on the market longer as buyers struggle to make deals pencil.
And yet, prices aren’t falling as quickly as you’d expect. Why? Because sellers are anchored to the past — still expecting 2021 prices, when cheap debt inflated valuations. Many are sitting tight rather than accepting lower offers, hoping rates will drop and buyers will return.
A Market Out of Balance
This tug-of-war between buyers and sellers creates a strange kind of market stalemate.
Sellers don’t want to lower prices, because they remember what their neighbor sold for two years ago.
Buyers can’t overpay, because the financing environment no longer supports it.
The result? Transaction volume drops dramatically, and only creative or strategic deals are getting done.
This moment in the cycle tests investors’ adaptability. It’s not just about who has the capital — it’s about who has the creativity to structure deals in a way that still makes sense.
Why This Environment Feels So Strange (and What It Really Means)
Historically, cap rates have followed interest rates fairly closely. When borrowing costs rise, cap rates typically expand to maintain healthy investor returns. But since 2020, we’ve been in an unprecedented period where property prices remained inflated even as borrowing costs surged.
Here’s why:
Low inventory. Many property owners refinanced at record-low rates during 2020–2021 and are in no rush to sell.
Sticky pricing. Sellers anchored to pandemic-era valuations are resisting discounts.
Strong fundamentals. Certain asset classes (like multifamily and industrial) still enjoy strong demand, allowing owners to justify lower cap rates despite higher rates.
Inflation hedging. Real estate remains one of the few hard assets that protects against inflation, keeping institutional capital flowing into the sector.
So, while the math looks broken on paper, investor demand hasn’t completely disappeared — it’s just evolved.
The Bigger Picture: The “Spread” That Drives Decisions
A key metric to watch in this environment is the spread — the difference between the property’s cap rate and your cost of debt.
When that spread is positive, financing enhances returns. When it’s negative, you’re effectively losing money on leverage.
But here’s the nuance: experienced investors don’t always walk away from negative spreads. Instead, they ask a deeper question — Can I improve this property enough to turn that negative spread into a positive one?
That’s where creativity, value-add strategies, and deal structure come into play — and it’s how many of today’s savviest investors are still finding success even when the numbers don’t look pretty upfront.
The Psychology of Buying in a Negative-Leverage Market
Buying when cap rates are lower than interest rates requires more than financial skill — it takes a different mindset.
Most investors are conditioned to chase instant gratification: they want cash flow from day one. But in a negative-leverage market, the best opportunities often come from patience and vision — acquiring properties others overlook, improving operations, and refinancing when rates normalize.
This is where long-term thinkers separate from short-term speculators.
When cap rates are lower than interest rates, the deals you buy today aren’t about immediate income — they’re about positioning yourself for outsized gains once the cycle turns.
The Silver Lining: Market Transitions Create Opportunity
It’s important to remember: markets like this don’t last forever.
Eventually, one of two things happens — either interest rates drop, or sellers adjust their pricing to bring deals back into alignment. When that happens, the investors who stayed active (not frozen) will be sitting on improved assets, stabilized cash flows, and significant built-in equity.
In other words, if you can find creative ways to buy now, you’ll be holding prime real estate when the pendulum swings back in your favor.
In Summary
When cap rates are lower than interest rates, traditional deal-making becomes tougher — but not impossible.
You can’t rely on simple “buy and hold” models anymore. You have to:
Understand how leverage impacts your return.
Look beyond day-one cash flow to value creation and appreciation.
Negotiate financing creatively.
Think like an operator, not just a buyer.
This environment challenges investors to level up — to trade instant gratification for strategic, calculated growth.
And those who adapt now will be the ones owning tomorrow’s best properties at yesterday’s prices.
5 Ways to Invest in Commercial Property When Cap Rates Are Lower Than Interest Rates
When cap rates dip below borrowing costs, many investors freeze — but the best operators know how to pivot. Deals still exist, but they require different thinking, smarter structuring, and a longer view.
Here are five proven strategies for continuing to buy and grow your portfolio even when traditional math says “don’t.”
1. Invest in Alternative Property Types
When the most popular property classes — like Class A multifamily, stabilized industrial, or medical office — attract all the competition, cap rates compress first. That’s when savvy investors look to alternative asset types that haven’t been overbid by institutional capital.
For example:
RV parks and campgrounds often trade at 8–10% cap rates and benefit from booming domestic travel trends.
Self-storage properties offer flexibility and resilience during both economic booms and downturns.
Car washes have emerged as a hybrid between real estate and business ownership, producing strong recurring cash flow.
Neighborhood retail centers or flex industrial assets can still deliver 7–9% returns in secondary markets.
These assets require slightly more operational oversight, but that’s where the opportunity lies. Fewer investors want to roll up their sleeves, meaning less competition and better pricing.
As Tyler mentioned in a recent Accelerator call, “You don’t need to chase the shiny object everyone else is chasing. You just need an asset type where the fundamentals make sense and the yield rewards your effort.”
In short — shift your focus to where institutional capital isn’t looking yet. That’s where the best spreads live.
2. Look for Value-Add Opportunities
When it’s tough to buy stabilized assets that cash flow on day one, create your own yield through value-add investing.
Value-add deals are properties that need upgrades, better management, or strategic repositioning to unlock their potential. These can range from cosmetic renovations and tenant improvements to full redevelopment.
Examples include:
Updating older retail centers with modern facades and signage.
Converting underutilized office buildings into flex or mixed-use spaces.
Improving operations in underperforming self-storage facilities.
Bringing rents to market after years of below-market leases.
The playbook is simple:
Buy below market value because of deferred maintenance or poor management.
Execute your business plan to increase NOI through renovations, lease-up, or operational efficiency.
Refinance or sell once the property’s value has appreciated.
Even if the deal starts with negative leverage, your improvements can create enough value to overcome that gap. Once the property’s NOI increases, its effective cap rate rises — turning a tough buy into a great long-term hold.
As Tyler often says, “Value-add is where real wealth is built. It’s how you turn a 4% cap rate into an 8% return without waiting on the market to fix itself.”
3. Target High-Growth or Undervalued Markets
If your local market is too competitive, go where others aren’t looking.
Cap rates are highly location-sensitive, and even small shifts in geography can mean major differences in yield.
For example, Class B multifamily in Los Angeles might trade at 4.5%, while a comparable property in Huntsville, Alabama, might yield 7%. That spread often reflects perception more than fundamentals — and investors who dig deeper can find opportunities in those “in-between” markets.
Look for:
Population and job growth: Markets with expanding industries often outpace national averages in rent growth.
Infrastructure investment: Follow new highways, distribution centers, or corporate relocations.
Favorable tax and business climates: States like Texas, Tennessee, and Florida continue to attract both employers and residents, sustaining long-term demand.
In a recent Accelerator conversation, one investor based in Ohio explained he was exploring ground-up flex developments because demand was strong but construction costs were still manageable. That’s a textbook example of how to capitalize on local market momentum before the rest of the country catches on.
Remember: you don’t have to outsmart the entire market — you just have to identify where growth will happen next.
4. Consider Creative Financing Options
When traditional bank loans don’t make sense, creativity becomes your best weapon. Many of the most successful investors in tight environments don’t necessarily find “better” deals — they find better ways to structure them.
Here are several creative approaches to explore:
Seller Financing: Convince the seller to carry part of the note. You can often negotiate below-market rates or interest-only periods, giving you breathing room while improving NOI.
Assumable Loans: Some sellers have loans with low fixed rates from 2020–2021. Assuming their debt can save you millions over the life of the loan.
Joint Ventures: Partner with capital investors who provide equity in exchange for a percentage of ownership — allowing you to limit debt exposure.
Bridge Loans & Construction Lines: Short-term loans let you acquire and improve a property, then refinance at a better rate once performance improves.
Crowdfunding or Private Equity Syndications: Pool capital from investors looking for passive opportunities while you handle the operations.
The key is to view financing not as an obstacle but as a lever. Every structure changes the math — and in a high-interest environment, that creativity can make the difference between “no deal” and “great deal.”
As Tyler told one member, “It’s not that the deal doesn’t work — it’s that it doesn’t work this way. Structure it differently and suddenly it does.”
5. Leverage Tax Benefits to Boost Returns
In markets where cash flow is thin, every dollar you keep matters. That’s why the tax side of commercial real estate can be just as powerful as the rent roll.
Savvy investors know how to use tax strategy to transform a marginal deal into a profitable one. Key advantages include:
Depreciation & Cost Segregation: Accelerating depreciation through a cost segregation study can create significant paper losses — often enough to offset active income.
1031 Exchanges: Deferring capital gains by rolling profits into new properties allows your portfolio to grow tax-free until you eventually exit.
Interest Deductions: With rates higher, your interest expenses are larger — which can now serve as a bigger tax shield.
Bonus Depreciation: Though being phased down from 100%, it still offers substantial front-end tax savings for new acquisitions or improvements.
Working with a CRE-focused CPA can help you design an ownership structure — whether through LLCs, S-corps, or trusts — that minimizes your exposure while maximizing after-tax income.
Even if the deal only cash flows modestly today, those tax advantages can significantly increase your effective return. As one Accelerator investor put it, “My cash flow might be 5%, but after depreciation, my real return is closer to 10%.”
When margins are tight, tax strategy is leverage. Use it.
The Takeaway: Adapt, Don’t Retreat
When cap rates sit below interest rates, the rules of the game change — but the opportunities don’t disappear.
You simply need to evolve your playbook:
Target less crowded asset types.
Add value instead of waiting for it.
Invest in emerging markets with growth tailwinds.
Get creative with financing and partnerships.
Use the tax code as a tool, not an afterthought.
As Tyler often says, “Commercial real estate rewards those who keep moving when everyone else pauses.”
This isn’t the time to wait for perfect numbers. It’s the time to build experience, build your network, and position yourself for the upswing. Because when the market finally rebalances — the investors who acted decisively now will own the best assets later.
Conclusion: The long game of commercial real estate
Investing in commercial real estate when cap rates are lower than interest rates isn’t for the faint of heart. It’s a market that tests your patience, creativity, and conviction. But for those who can think long-term, it’s also one of the best opportunities to build lasting wealth.
This environment separates speculators from strategists. Speculators look at a spreadsheet and walk away when the numbers don’t fit neatly into a box. Strategists, on the other hand, ask better questions:
How can I add value?
Can I re-structure the debt or bring in a partner?
Is this market about to grow while others are shrinking?
They don’t rely on perfect conditions — they create their own.
The Power of Patience and Positioning
Every investor dreams of catching the next wave of appreciation, but timing the market is nearly impossible. What you can control is your positioning.
While many buyers have paused, waiting for rates to fall, a select few are quietly acquiring properties, improving them, and stabilizing their cash flow. When rates inevitably come down — and they will — those investors will refinance at lower costs and instantly increase their returns.
Turning Challenges Into Advantages
Buying when cap rates are lower than interest rates forces you to sharpen your skills. It pushes you to underwrite more conservatively, negotiate more creatively, and manage more efficiently. It makes you a better operator.
You’ll learn to:
Spot inefficiencies others miss.
Negotiate flexible financing terms that protect your downside.
Build partnerships that multiply your reach.
Use tax strategies to transform average returns into exceptional ones.
These are the same fundamentals that build generational portfolios — not quick wins.
The Legacy Perspective
For many investors in this community, commercial real estate isn’t just about hitting a financial milestone — it’s about freedom, stability, and legacy.
It’s about creating something that lives beyond the next market cycle — assets that produce income for your family, opportunities for your community, and pride in what you’ve built.
Commercial real estate is a long-term wealth engine. It rewards persistence, creativity, and vision more than timing or luck.
When you buy smart — even in tough conditions — you’re not just acquiring square footage; you’re acquiring freedom. Freedom to choose how you spend your time, who you work with, and what kind of life you design.
Final Thoughts: Buy When Others Pause
When cap rates are lower than interest rates, the numbers may look discouraging — but that’s exactly why this is a window of opportunity.
Most investors are waiting on the sidelines. A few are adjusting their strategy, thinking creatively, and quietly positioning themselves for the next expansion cycle. Those few will emerge stronger.
This is the time to learn, to partner, to structure deals differently, and to grow as an investor. Because once rates drop and capital floods back in, competition will return — and the easy wins will be gone.
So keep looking, keep underwriting, and keep building. The goal isn’t to buy perfect deals — it’s to make imperfect deals profitable through skill, persistence, and strategy.
Because at the end of the day, the investors who adapt when others wait are the ones who end up owning tomorrow’s best properties at yesterday’s prices.
For those interested in delving deeper into commercial real estate investing, check out our course offerings. The courses provide in-depth insights, real-world case studies, and practical strategies to help you navigate the complexities of commercial real estate and achieve success in your ventures. Whether you're a seasoned investor or just starting in the world of commercial real estate, there's always more to learn. Equip yourself with the knowledge and tools you need to thrive in commercial real estate!
Commercial real estate has long been a reliable vehicle for generating passive income, preserving wealth, and leveraging tax advantages. But what happens when the math doesn’t make sense—when cap rates fall below the interest rates you’d pay to finance a deal?
In today's high-rate environment, that's exactly what many investors are facing. With properties still trading at cap rates of 4–6% while borrowing costs sit at 7% or more, the numbers don’t pencil out as easily as they used to. For aspiring and seasoned investors alike, this raises a major question: How do you buy when the deal cash flows don’t work at face value?
Let’s break down what it means when cap rates are lower than interest rates—and five ways you can still acquire profitable commercial real estate in this tough climate.