Investors often ask about in-place cap rates on BAM Capital’s acquisitions relative to current interest rates. This relationship tells investors if the Sponsor is creating positive or negative leverage on these investments. While this question is fair, it doesn’t tell the whole story.
Real estate is a cash flow business. The trick is to underwrite a property not on in-place cash flow, but on stabilized cash flow. This calculation gives us a stabilized cap/yield, which is the most important metric when evaluating real estate. Not only is this metric important relative to current interest rates, but it gives us the intrinsic value of the property.
Below are two scenarios that display the difference between an in-place cap rate and a stabilized cap/yield with the corresponding cash-on-cash yield. Let’s look at the in-place proforma. BAM Capital acquires a portfolio for a 5% cap rate on in-place net operating income (NOI) and borrows money from a lender for 5.5%. This relationship represents negative leverage (in-place cap rate < interest rate) as it yields an initial levered cash-on-cash return of 4.25%. Does this initial below average return make the deal bad? The answer is unequivocally no.
Now let’s fast forward to the stabilized proforma showing the stabilized cap/yield relative to the interest rate. A portfolio is purchased at a 5% cap rate and is underperforming the market (rents below market, occupancy struggles, above market operating expenses, etc.). All other assumptions being equal, BAM Capital executes the business plan and takes net operating income from $5 million to $7.5 million. This equates to a stabilized cap/yield of 7.5% compared to the interest rate of 5.5%. This relationship is called positive leverage (stabilized yield > interest rate) as it now yields a levered cash-on-cash return of 10.50%. Not a bad deal after all.
This example clearly illustrates why the stabilized yield is critical to current interest rates. More importantly, the stabilized yield is paramount to the market cap rate, which creates real value for our investors. In the above example, the stabilized yield is 7.5% and the market cap rate is 5.5%. This 200-basis point spread is all profit. Said another way, A portfolio is acquired for $100 million with $5 million in net operating income (5.0% cap rate). BAM Capital increases the net operating income to $7.5 million (7.5% stabilized yield). We sell for a 5.5% cap rate on $7.5 million of net operating income ($136 million), which produces a levered equity multiple close to a 2.0x. So why the initial cash on cash yield wasn’t appealing, the overall investment delivered healthy returns to the investor.
Disclaimer: This document is for informational purposes only and is not financial, legal, or investment advice, nor an offer or solicitation to buy or sell securities. Investment opportunities offered by BAM Capital are made pursuant to Rule 506(c) of Regulation D and are available exclusively to accredited investors, as defined by the Securities and Exchange Commission (SEC). Verification of accredited investor status is required before participation in any investment. The information contained herein reflects the opinions of the author and does not necessarily represent the views of BAM Capital. Any financial terms, projections, or forward-looking statements contained herein are hypothetical in nature and should not be interpreted as guarantees of future performance or safety. Such statements reflect opinions and are subject to market fluctuations, economic conditions, and investment risks. Investing in private real estate securities involves significant risks, including but not limited to illiquidity, economic downturns, and potential loss of invested funds. Past performance does not guarantee future results. Prospective investors are strongly encouraged to conduct independent due diligence and consult with legal, tax, and financial advisors before making any investment decisions. The information provided in this article is current as of its publication date, September 2025. BAM Capital makes no representation or warranty regarding the accuracy or completeness of the information contained herein.
Hypothetical Performance Disclosure: The sample performance results presented are hypothetical in nature and do not reflect the actual investment results of any specific client or portfolio. These results were achieved through the retrospective application of a model or backtested strategy. Hypothetical performance has inherent limitations: 1) it is prepared with the benefit of hindsight; 2) it does not involve financial risk or the impact of actual market liquidity; and 3) it may not reflect the impact of material economic factors. No representation is being made that any account is likely to achieve profits similar to those shown. Theoretical results do not reflect the deduction of actual fees. Actual results will vary.
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Author: Tony Landa, Senior Economic Advisor, The BAM Companies, February 2026
