Brian Sereny is right. However he fails to mention that condo conversions are not profitable. So buying these properties is terrible investing. Ever heard of a CD? Much less risk and work for greater reward. Wait another year and re-evaluate then.

Unless you have plans to convert the property into condos or something else, a 1-2% CAP rate makes zero sense.

Certainly...do your math and as much as in any market, buyer beware.

Remember that in recent years, sellers and buyers saw real estate with "diamond" glasses. Many people bought with the expectation that they were going to turn a fortune buying and selling.

In today's market, the effect is similar, except the seller may be trying to paint a picture and you can no longer afford to "speculate". Investment property cannot be seen with the same eyes as you'd see the purchase of your home. If the numbers don't support the transaction...walk away.

Buy right, take it slow (specially if you're not very experienced), do your due dilligence (inspect, run numbers by an experienced real estate accountant, etc) and listen to your insticts.

A low cap rate may not be bad if you have the means to carry the property, if the property could command higher rentals as-is or after some minimal repairs like mainentance issues (paint, landscaping, parking, etc), or if you feel you can improve the vacancy rate in the building among others.

Remember though, you may need to fund out of pocket for several months to up to 24 months depending in the situation. If you feel you may fall short, find something else.

Remember, luck is when preparation meets opportunity. Don't let it be about bad luck by going into one of these deals unprepared. If you found a good opportunity, still, take all the precautions and prepare for all possibilitied, good and bad.

The effect is that you would come out of pocket with money every month. 1-2% return does not seem to be enough cushion to cover for major repairs and/or replacement. The upsale potential is the possibilty of appreciation- that is why people are buying.

Elizabeth - the only warning I will give you about buying properties with very low cap rates is to really look into the financial statements in depth. Make sure the expenses are true and real and make sure that you calculate any additional unexpected expenses especially when you are dealing with older buildings that may require new roofs, a/c's, plumbing or electrical.
You also have to take into consideration vacancy rates as well as management expenses if any. We are seeing a lot of investors that see the potential of long term investment in South Beach and are willing to take on the projects even with very low cap rates.