CAP RATES

Rehabbing, Fix and Flip, Rental Properties
1

Hello Everyone,

Just looking for a few pointers I use 50 percent rule and the 1 percent rule to narrow down my picks I’m wondering about Gross rent multiplier and CAP rates. Which one is a better estimator and what kind of numbers do you all feel are sound.

2

Forget the cap rates, they are ABSOLUTELY USELESS for small residential buildings.

Personally, I figure expenses at 50% of gross rents; won’t look at a property unless the monthly gross rents are at least 2% of the purchase price; and won’t buy unless the cash flow is $100 per unit per month.

Mike

3

If you’re looking at larger buildings/complexes, you’ll be seeing CAP rates regarding these properties. If you’re a buyer, you’ll be looking for a higher CAP rate (meaning bigger NOI). If you’re a seller, you’ll want a lower CAP rate (means bigger sales price for you). You can compare the GRM for your potential purchase with other recent deals in your area. If you’re in a smaller area, you may not be able to find any data to determine if your numbers are good or bad (relating to a GRM). This is why Mike’s guidelines are great. They’re indifferent to the number of units, location, etc.

4

Thanks you guys,

That is why I love this site. And propertymanager I’d like to thank you for all the advice you’ve given me in the past. I’ve closed 3 deals this year on mutlifamily units and I’ve used your advice and guidlines everytime and so far I’m averaging $200 per unit. These rules make the search and negotiation a little more difficult but it is all worth it in the end.

Thanks again,

5
I've closed 3 deals this year on mutlifamily units...and so far I'm averaging $200 per unit.

Congratulations! It sounds like you’re doing GREAT!

Mike

6

Hi,

Propertymanager says that one criterion is montly rent >=2% of purchase price.

This is 24% of the purchase price in rental income per year. The GRM is 4.17.

Are you finding these deals mostly in Midwest or the South? I am in New

England, it is very hard to find GRM in that range even for distressed properties.

Thanks,
Dave

7
Are you finding these deals mostly in Midwest or the South?

Midwest. Mine are in Ohio, but they’re all over in flyover country. Take a flight from coast to coast, take a nap the first half hour and last half hour. On the rest of the flight look out the window - that’s where the deals are!!!

Mike

8

Oddly enough, most of those states will be red on an electoral college map!!