What mistakes do people make with cap rate?

The biggest is computing net operating income without vacancy, management or capital reserves, which inflates the cap rate by one to two points. Others are using the seller's tax bill instead of the reassessed one, comparing cap rates across different markets, and treating cap rate as a return on your own cash.

Listing pro formas omit management because the owner self-manages, omit reserves because nothing broke this year, and assume full occupancy. A 7.9% listing cap rate built that way is often a 5.8% property. Rebuild the NOI yourself.

Property taxes reset at sale in many counties, and the seller's bill can understate yours by 30% or more. And cap rate says nothing about financing: a 6% property is a 4% cash on cash return at 25% down and 7% rates. Use cap rate to judge price, then add your loan.