In its simplest form the cap-rate is the net operating income (NOI) divided by the sale price. If a building is bought with cash the NOI is very different then if it is leveraged. The article shows how to factor in the debt service and interest with the other factors so that your analysis is better.
San Francisco investors are investing in future equity definitely not cash flow. As someone once told me there are as many different investment reasons and goals as there are investors.
Obviously borrowing 70% at 6.5% changes the return.
So the question is, what is the value of the property I'm looking at? This particular property I'm looking at has gross rents of 72k a year. It has net profit after taxes and expenses of 60k. Therefore I'd be willing to pay $1 million, if I expected a 6% cap rate. If I should expect a 5% cap rate, I would pay 1.2 million for this property. If it is less than 5%, I won't buy it, I'd rather have a Tresuary bill.
Are INVESTORS recieving the equivalant of 5% cap rate in San Francisco now? If not, why in the world are they investing?
Short answer is no. Unless you paid cash, had no expenses or costs and could charge current market rents.
The cap rate is found by taking the "net" operating income and dividing that by the value or purchase price.
Annual rents of $60,000 with a purchase price of $1,000,000 would give you 6% cap rate if you had no expenses.
If you put 30% down on that $1,000,000 your principle and interest payment, at 7% interest, would be over $55,000/year leaving just $5,000/year to pay insurance, repairs and cover vacancies, so your net income would actually be a negative number.