Can anyone give me good idea of what kind of cap rate I should shoot for?
I have seen cap rates in the range of 9%-9.7%.
Good/Bad??? Any ideas…
From most things that I’ve read, a good goal to shoot for is 10%…
I try to make money…that’s my goal! I will not purchase unless I can get AT LEAST $150 a month cashflow after EVERYTING is paid (including maintenance, management, vacancy, etc., ntot just PITI!). I deal with lower priced properties though (<$75K)…
Keith
if investors in southern calif. demanded 10% cap rates, nobody would buy anything.
in south orange county, entry level 1,120sf houses (20 miles from the ocean, 25+ years old) that sell for around $550,000 or more are renting for around $1,800 gross per month. if you assume 20% expenses (which is low if you are honest about expenses), the imputed value based on a 10% cap rate is $172,800.
4 plexes with about $6,000 gross per month income are selling for around $1,000,000. imputed value with 10% cap rate is $576,000.
buyers out here better hope the properties keep going up in value alot!
<<IF investors in southern calif. demanded 10% cap rates, nobody would by anything. >>
– IF wishes were horses, beggars would ride
– IF a frog had wings, he wouldn’t bump his @$$ when he hopped
– IF my aunt had a beard, she’d be my uncle…
IF investors in Southern California demanded a positive cashflow nothing would be sold either…they’re not investors, at this point they’re largely speculators – hoping and praying for further capital appreciation. When I answered, I assumed that Mackie was questioning “in the real world”.
Keith
So if I found a property with a cap rate of 9.6% and my expenses were approximatly 18% of GOI - am I estimating expenses on the low end? The property is listed for $210,000.
This property would give me $370 per month income after expenses. (figuring 1 month vacany loss, insurance, property taxes, debt service, 8% managment fee <we plan to manage the property but I keep that # in there for calcuations>, and some reserves for maintainance).
Keith is your $150 of income before or after tax flow? I guess that I am on the right track because the properties that I am looking at are similar to the properties that you invest in - in the respect that they are appx 2x’s the asking price with 2x’s the income. Does this sound right.
My numbers are before tax advantages (that’s nice, but just icing on the cake…).
I think you’re very much on the right track here and are "optomistically cautious. You are figuring all the right things into the equation. Remember that you are adding in 8% management and that will be your ‘salary’, so to speak.
Where are you located?
Keith
Keith,
I am in NH…where are you located?
I am intrigued by your profile, you and your wife sound like my husband and me. We seem to target the same kinds of properties and have a similar investment objectives. So I am curious about your experiences…you seem very knowledgeable and experienced. So if you don’t mind…I just had a few questions about your experiences…
How long have you been doing REI?
Do you only do long-term rental properties.?
How many properties do you purchase a year?
How many do you currently own?
What size, # of units - do you like to purchase?
Do you manage the properties youself?
What kind of financing do you typically shoot for?
Any good books you can recommend to me on REI?
And finally - do you like what you do - is it what you expected it to be when you first started out?
I am need the final push out of the gate to get moving on my own…I just need to hear success stories. I know that we can be successful doing REI…it just helps to know others stories who have walked the same path…
Thanks for all your input…
"Good/Bad??? Any ideas… "
This is bound to illicit some interesting responses, but…
…when buying Single Family Residences…I concentrate on GRM over Cap Rate.
That will assure you’re getting a good buy @ any given time in any given market.
-Infowell
Gross rent mult or cap rate I’m still intrigued by luaprenraw’s comments about the market in California. Is it just a matter of how well you can control the bleeding? Do cash flows improve in California on commercial deals?
-housebroken
Everyone is hemoraging in California…it’s brutal.
Keith
Well things are a little different since the last post… And I think 10% cap rates are a little more achievable, especially with all the foreclosures and price reductions. I certainly wouldn’t settle for much less than 10% (even with cash to burn). The problem now, however, is everyone’s scared to buy with economy uncertainty’s. A millionaire cattle farmer I know always said, “You don’t buy cattle when everyone else is, you sell!”
So, what? People are still buying at lower caps in better areas, so you’re not even playing in the game. It all depends on the location. In Manhattan, Toronto and many other big cities, they’re still buying with crummy cap rates. There’s plenty of people who’ll still buy a 7% cap in Toronto because they’re speculating on it going up even more and it’s a much more stable market than other cities. Interest rates are also lower in bigger cities with more stability.
As for the cattle analogy. You’re comparing apples and oranges. The smart stock brokers sell or short when everyone else is selling and they buy and ride the wave when everyone else is buying with a trailing stop loss (selling when it looks like the price is consistently falling). I can show you 20-30% potential cap rates in Detroit and the property will be worth less next year. There’s other factors at play here such as location.
Yeah… I’m just saying I wouldn’t settle for a crummy cap rate (my opinion). Obviously I’m not going to buy a property with a good, or bad, cap rate if I think it’s gonna be worth less next year. In this economy, I think one can have their cake and eat it too. Why not get a property with a good cap rate and a bright future… Bring in a little cash flow while you wait.
Also, the cattle guy plays the stock market and that’s actually where he made his fortune. But your right, there’s a degree of apples to oranges… That’s what makes investing so much fun.
Mackie, 10 is good, but 9.7 is close enough.
However, you need to figure the cap rate yourself with figures that you’ve gathered yourself. I’ve seen a few properties advertised at a 10 cap that when I gathered figures and ran them, with my figures the property was seriously negative: a great big expensive sink hole.
Real estate agents and sellers always neglect to consider some really big expenses when they estimate the cap rate.
Also, when you are looking at real estate, you must also consider the cost of the deferred maintenance, which is often quite substantial.
I agree with most of what has been said above, especially davewindsor. Something my high school econ teacher always said, “the market rewards risk.” Here in Los Angeles, you can find a 10% CAP–in a rough area where management is intense, vacancy is high, and appreciation is low. Conversely, recent deals in the Beverly Hills, Brentwood, and Santa Monica areas have traded at 4 and 5% CAPs. Personally, I’d prefer a ‘B’ area at at 7%+ CAP on actual income.
By the way, I am referring to multi-family property, which is my expertise. Retail is suffering from much higher vacancy and therefore trades at higher CAP rates.
I analyze all potential purchases on the cash flow. The only exceptions I make to that rule are properties that are undervalued due to poor management or other factors that I can quickly add value to and create a positive cash flow.To purchase and hope for appreciation will cause me to go broke quickly. I might as well become a politician.
SKS
After reading some of these posts I read one that stated using a cap rate with a single family residence. You should never use a cap rate to derive a value for single family properties. Cap rates are used for commercial property and should not be used on single family or small multi-family properties >=4 units.
I saw a post talking about a 4-5% cap rates in Cali. I would tell you that that is what has gotten California commercial real estate in trouble. At a 4-5% cap rate there is no money to be made and the buyer is betting on appreciation rather than cash flow which is a losing proposition in this market. Ten years ago it may have worked but not now.
Another side note you don’t shoot for a cap rate. You analyze a property based on your goals and investment strategy. Develop your cap rate based on the former. Then make an offer based on your goals. The ball is in the owners court to take it or leave it. If it doesn’t make dollars it doesn’t make sense.
Maybe the question should be a little more accurate. For days I have been searching out topics on cap rates. I’ve read a lot of references that are opposite of each other on “What is a good cap rate?” and “What is not a good cap rate?”.
Even Robert Kiyosaki was not clear with his explanation of cap rate.
I am posting this question under a new topic in this forum so maybe we can get some clear answers.
See you there.
How do you calculate annual NOI??? What are the key expenses that should/must be factored in to make sure it is accurate?
there is no right answer on what is a good cap rate,I deal in single family, i don’t use cap rates, but if a property is in a highly desirable neighborhood, one that I really like, obviously I will do a deal at a lower cash flow (lower cap rate) than a house in a ‘so so’ area.
Lower income properties will cash flow better than homes in better neighborhoods, but probable won’t appreciate as well.
I don’t buy anything that doesn’t project a good cash flow,but what is good for one deal isn’t good enough for a different house in a different location