The 6.5 that beat the 7.5

Two deals crossed my desk the same month. One was a 7.5 cap, the other a 6.5. Every instinct says buy the 7.5. You're getting a full point more yield.

But the 7.5 had five years of term, a shaky guarantee, and flat rent. The 6.5 had fifteen years, a corporate guarantee, and 2 percent annual bumps. Run both forward a few years and it isn't close. The 6.5 keeps paying, keeps growing, and holds its value. The 7.5 is a countdown to a leasing problem, and its extra yield is really the market paying you a little more to take on a lot more risk.

The buyer who chased the headline number bought the worse building. The one who read past it bought durable income at a fair price.