Many commercial real estate investors are sidelining themselves by holding out for double-digit cap rates that are nearly impossible to find, according to Larry Gotcher, owner and principal agent at Resource Realty Group in Michigan. Gotcher, who closes between $100 million and $150 million in income-producing property transactions annually, says outdated return expectations are preventing buyers from building long-term wealth and taking advantage of current market opportunities.
The commercial real estate market has changed significantly over the past year, with rising interest rates, tighter lending standards, and increased competition for high-quality assets. Despite these shifts, Gotcher observes that many investors are still anchored to minimum cap rates of 10 or 12 percent—thresholds that rarely exist in today’s market.
“A lot of investors have a minimum of a 10 or 12% cap rate, which is almost unheard of,” Gotcher says. He notes that these expectations are unrealistic in nearly all major markets. As a result, many buyers are waiting on the sidelines, while more experienced investors move forward with acquisitions that offer lower cap rates but greater potential for appreciation and rent growth.
Gotcher believes many investors misunderstand how wealth is built in real estate. “Investors are a little bit too greedy,” he says. “They want to see high cap rates when they should be focusing on appreciation and rent increases, because those are likely to happen.”
He explains that even if a property breaks even in the first year, the combination of appreciation and rising rents over five to ten years will often deliver more substantial returns than waiting for a high cap rate that never materializes. “A lot of investors are worried that it’s not cash flowing at a high enough rate right now,” Gotcher says. “But they’re not considering that if you break even now and it’s a good property, you should still buy it. You’ll make your money later.”
This approach is especially relevant in markets where rental demand exceeds supply, thereby increasing the likelihood of appreciation and rent growth. Gotcher’s advice is direct: “As long as you’re cash flowing, you should still make the purchase.”
Gotcher says the current market is also shaped by the arrival of “COVID investors”—individuals who received significant capital during the pandemic but lack real estate experience. “There’s a lot of what I call COVID investors that were created from COVID,” Gotcher says. “Millions of people received half a million dollars who had never seen $5,000 in their lives, and now they’re scared to invest that money.”
According to Gotcher, these inexperienced investors are complicating the market by making offers that often fall through. “They kind of get in the way of the sophisticated investors because you get these offers that aren’t real, and they end up falling through.” The result is a market with more failed transactions and fewer deals closing, even as properties with long-term potential remain available.
Lending standards have tightened considerably, adding to the disconnect between investor expectations and market reality. Gotcher reports that loan-to-value ratios have dropped from 65-70 percent down to about 50 percent in many cases. This has forced both lenders and borrowers to become more creative in structuring deals.
In this environment, Gotcher argues that investors focused solely on cap rates are missing a broader opportunity. “Investors need to be a little more realistic,” he says. Otherwise, he warns, they risk remaining on the sidelines and missing out on long-term gains.
To address these new challenges, Resource Realty Group has shifted its focus to investors who value long-term value and total return. With an average transaction size of around $4.5 million—an unusually high figure for Michigan—the firm primarily works with clients acquiring apartment complexes and other income-producing assets.
Gotcher’s team emphasizes educating clients on current market conditions and helping them structure deals that may not meet traditional cap-rate benchmarks but offer strong prospects for appreciation and rent growth. As more investors recognize that waiting for 10-12 percent cap rates may mean waiting indefinitely, Gotcher believes that evaluating deals based on total return rather than immediate yield will become a more widely accepted approach in commercial real estate.
By focusing on realistic return expectations and long-term wealth building, Gotcher argues that investors can avoid self-imposed barriers and capitalize on opportunities that less flexible buyers miss.
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