Two concepts that explain 80% of real estate investing
Retail investors often hear jargon that sounds technical but is actually learnable. Two ideas are worth mastering early:
- Cap rate: a quick shorthand for the price you are paying for a stream of income
- The capital stack: how a property is financed using debt and equity, and who gets paid first
If you understand these, you can ask sharper questions and avoid “headline-driven” decisions.
Cap rates, in plain English
Cap rate is commonly defined as:
Cap rate = Net Operating Income ÷ Property Value
Think of it as a snapshot of “unlevered” yield: what the property produces relative to what it costs.
A few important nuances:
- Cap rate is most useful for comparing similar assets, not totally different property types or locations.
- Cap rates can move even when the tenant pays on time, because market pricing shifts with risk appetite and financing conditions.
Why cap rate stability matters
When cap rates are whipping around, buyers and sellers struggle to agree on price. When cap rates stabilize, transaction activity tends to normalize because expectations converge.
That is one reason the net lease sector has been interesting lately. In Q4 2025, overall net lease cap rates were reported around 6.81%, moving only 1 basis point quarter-over-quarter, suggesting a steadier pricing environment than prior years.
The capital stack: who gets paid first
A commercial real estate purchase often uses both debt and equity, similar to a home purchase. The “capital stack” is simply a picture of that structure.
In general:
- Senior mortgage debt sits at the top of the stack and typically has the first claim on cash flow and sale proceeds.
- Equity sits below the debt and typically absorbs volatility first, but also has the most upside when things go well.
This is why two properties with the same tenant can feel very different as investments, the financing and structure can change the risk profile meaningfully.
Equity vs credit, two different ways to participate
KKR’s overview is helpful here: private real estate investing can be done through equity (ownership) or credit (lending). Equity returns typically come from income plus appreciation and eventual sale; credit returns typically come from interest payments and repayment of principal, with different downside characteristics.
For most retail investors, the right choice depends on goals:
- Prioritize income stability and downside protection: you may prefer strategies that emphasize durability of cash flow and seniority in structure.
- Prioritize total return and upside: equity exposure can offer more potential upside, with more sensitivity to price changes.
How this connects to net lease investing
Net lease real estate can be attractive because the income stream is often defined by a long-term lease, and in a triple net structure the tenant commonly covers taxes, insurance, and maintenance.
But investors still need to underwrite:
- Tenant durability
- Lease rollover timeline
- Real estate quality and alternative uses
- Financing sensitivity and liquidity assumptions
The Dey Street lens
We like explaining our market in simple terms because it keeps everyone focused on what matters:
- Is the income durable?
- What assumptions are embedded in the price?
- What happens if the future is different than the base case?
Bottom line: Cap rates tell you what you are paying for income, the capital stack tells you who gets paid first. Together, they form a practical framework for understanding risk and return.
Disclosure: This article is for informational purposes only and is not investment advice. All investing involves risk, including the possible loss of principal.