Why “Cap Rate Must Be 150+ Basis Points Above Debt”
Written by Jai Thompson
I manage a private equity platform deploying 13–18 million per quarter across multiple real estate asset classes. Our model is asset-based, escrow-directed, and execution-driven, allowing us to close in 23 days or less with certainty and clean title flow.
Capital is structured. Operators are paid. Reserves are built in. All disbursements are escrow-controlled.
One of my non-negotiables:
Cap rate must be 150+ basis points above debt.
Let’s break this down simple.
First — What Is a Basis Point?
1 basis point = 0.01%
100 basis points = 1%
150 basis points = 1.5%
Example:
6% vs 4.5%
That difference = 1.5%
That equals 150 basis points.
What This Actually Means
Cap rate = what the property earns
Debt rate = what the loan costs
If the property earns more than the debt costs, you create positive leverage.
If the debt costs more than the property earns, you create negative leverage.
We only buy positive leverage.
3rd Grade Example
Property NOI = $600,000
Cap rate = 6%
Value:
$600,000 ÷ .06 = $10,000,000
Debt rate available = 4.5%
Difference:
6% − 4.5% = 1.5%
That is 150 basis points.
This is good.
Why Is This Good?
Because the property earns 6%
But your money costs 4.5%
You are borrowing cheaper than the asset yields.
That spread creates safety and profit.
Now Let’s Show It in Real Math
Assume:
Loan = $6,000,000
Debt rate = 4.5%
Annual debt cost:
$6,000,000 × .045 = $270,000
NOI = $600,000
After debt:
$600,000 − $270,000 = $330,000 cash flow
Strong margin.
Now Let’s Do It Wrong
Same property.
But debt rate is 7%.
Debt cost:
$6,000,000 × .07 = $420,000
NOI still $600,000
After debt:
$600,000 − $420,000 = $180,000
Much thinner.
If NOI drops 10%:
$600,000 × .90 = $540,000
Debt still $420,000
Now:
$540,000 − $420,000 = $120,000
Very tight.
Risk increases fast.
Why 150 Basis Points?
Because it creates cushion.
If:
Cap = 6%
Debt = 4.5%
Spread = 1.5%
That spread protects:
• Cash flow
• DSCR
• Refinance potential
• Downside stress
Less than 100 basis points spread = dangerous.
More than 150 basis points = comfortable.
Hotel Use Case
Hotel NOI = $1,000,000
Cap = 8%
Value:
$1,000,000 ÷ .08 = $12,500,000
Debt at 6.5%
Spread:
8% − 6.5% = 1.5%
Good.
Loan 70%:
$12,500,000 × .70 = $8,750,000
Debt cost:
$8,750,000 × .065 = $568,750
Cash flow:
$1,000,000 − $568,750 = $431,250
Now stress NOI down 10%:
$900,000
Cash flow:
$900,000 − $568,750 = $331,250
Still safe.
That 150 basis point spread saved the deal.
Why This Matters for Your Model
You are using structured leverage.
Your 24% lender position is protected.
But when you refinance or stabilize:
You must make sure the long-term debt cost is lower than the property yield.
Otherwise:
You buy yourself into a math problem.
The Simple Rule
Cap Rate – Debt Rate ≥ 1.5%
If not, I walk.
Because:
Positive leverage grows equity.
Negative leverage kills deals.
Final Simple Formula
If Cap = 6%
Debt must be 4.5% or lower.
If Cap = 7%
Debt must be 5.5% or lower.
If Cap = 8%
Debt must be 6.5% or lower.
That is discipline.
That is protection.
That is why 150 basis points must be above.
Structure over sacrifice. Stewardship over struggle. Every deal builds legacy.