Cap Rate Compression Trap

The trap that makes investors think they’ve made money—when they’ve actually accepted lower returns for higher risk

If you look at a property and say, “The cap rate dropped from 8% to 6%, I made a profit”—stop.
You might not have made money. You might have walked into a trap.

Cap Rate Compression is when the market prices properties at lower yields.
It usually happens when cheap capital enters the market, interest rates are low, demand rises, and competition increases.

But here’s where the problem begins:

When you buy at a lower cap rate, you’re paying more for the same NOI.

Now for the part most investors miss:
If cap rates go back up—even with no change in income—your property value drops.

Example:
A property with an NOI of $100,000:

• At an 8% cap → value = $1,250,000
• At a 6% cap → value = $1,666,000

On paper, it looks like you gained value.
In reality—you just bought at a higher price.

Now imagine interest rates rise, demand cools, and banks become more conservative.
Cap rates move back to 7.5%.

That same property is now worth about $1,333,000.

You didn’t change anything—yet you just wiped out hundreds of thousands of dollars in value.

This isn’t theory. It’s market math.

The real trap is that investors build strategies based on continued cap rate compression, instead of actual NOI growth.

And that’s the difference between an investor who profits from the asset—and one who profits from hype.

If you don’t know how to separate real value creation from temporary market shifts, you’re not really investing—you’re betting on macro conditions.

This is a critical part of working with investors:
Not building a deal that looks good today, but building one that survives when the market turns.

Because in the end, the game isn’t how much you made on paper—
it’s how well you hold up when reality corrects you.