Investor · Round Rock, TX · Member since 2018 · 24 posts · 14 votes
Hi all, just starting out and looking to buy a duplex in the Cottonwood Heights area near Salt Lake City. Could anyone tell me what the CURRENT cap rate should be in that location? More general question is HOW do I accurately find out what the cap rate for an area/property should be? Thanks all the members for great postings. I have learned a lot the last few months just passively reading others posting. Thank you all for sharing.
Real Estate Investor · West Linn, OR · Member since 2017 · 134 posts · 62 votes
8y
I see property in good areas of SLC valued where market rents are about 0.5% of property price. I.E. 2000K/mth in rent= valuation at 400K. You can kind of extrapolate a cap rate based on this and it aint great. 3.5-6% would be my estimate based on how agreesively you model expenses.
Investor · Salt Lake City, UT · Member since 2016 · 89 posts · 41 votes
8y
Hi Daniel,
I think what I have been seeing for the most part is that duplexes up to four plexes are not necessarily marketed at certain cap rates but whatever the market and comparable properties have been selling for.
Maybe a factor that contributes to this is that anyone with a traditional home mortgage can purchase up to a 4 unit building without getting a commercial loan. I think allowing regular home buyers to buy properties like this brings more competition.
Sorry I dont have any specific numbers for cap rates though. I am definately following this forum to see if anyone out there does have that info.
Real Estate Investor · West Linn, OR · Member since 2017 · 134 posts · 62 votes
8y
I see property in good areas of SLC valued where market rents are about 0.5% of property price. I.E. 2000K/mth in rent= valuation at 400K. You can kind of extrapolate a cap rate based on this and it aint great. 3.5-6% would be my estimate based on how agreesively you model expenses.
Carrollton, TX · Member since 2015 · 415 posts · 371 votes
8y
Hello,
Properties ranging from single family residence to 4-plex (1 to 4 unit dwellings) are generally considered residential properties and as such they are valued using recent sales of comparable properties. So I would start with "comps" to estimate your acquisition costs. Once you have the "comps", you can use "cap rate" (if you so insist) to compare residential properties amongst themselves, or against commercial properties, or any other types of investments for that matter.
If it were me, I would start with the "comps", and project revenue, expenses, loan payments, etc. to estimate my cash on cash (i.e. CoC), and then run my CoC projections for as many years as I plan to keep the investment. I may even calculate the IRR. If I like the CoC and the IRR, I'll make the offer.
I usually skip "cap rate" analysis and let the savvy investors use it.
Real Estate Broker · Provo, UT · Member since 2013 · 689 posts · 511 votes
8y
@Daniel Kokodoko There are countless factors that go into getting to the metrics where you can actually calculate a cap rate - so you're going to have a pretty tough time getting an accurate number for an entire area. Additionally, every property is unique with different methods and terms of financing, performance, tax consequences, etc... And then take into consideration that nobody can really calculate an accurate cap rate until after the property has (or hasn't) performed.
So with that said, generally speaking if you are getting 5% in that area of SLC you're doing pretty good - probably better than most.
Investor · Round Rock, TX · Member since 2018 · 24 posts · 14 votes
8y
@Immanuel Sibero this is exactly what I'm doing. In my situation (getting 30 year mortgage with 25%) the Cash on Cash return are pretty low. They range from 2 to 4%. I'm looking to use the Cap Rate to see how the deal I'm looking at compare with others in the area. In addition to comparables in the area, since I'm looking at duplexes. Maybe the real question is, is 2 to 4% COC in the Salt Lake area the norm?
2% to 4% CoC on residential rentals?? That shouldn't be the norm anywhere! Even CD's are already starting to pay 2%+ these days. Why would you invest for 2% to 4% with risks of damages, nonpayment of rent, etc. when you can do the same with zero risk CD's?
You will find that Biggerpockets preaches mostly cash flow as investment objective (i.e. CoC). However, for those of you investing on the west and east coasts, appreciation potential can be significant enough where it would make sense as an additional investment objective (i.e. IRR). So if your 2% CoC investment also throws out 20% IRR (i.e. because of potentially insane appreciation), then it's obviously an excellent investment, but this is rarely achievable unless you invest in west or east coast and have a good crystal ball.
Oh by the way, you can do all the above analysis without using "cap rate". Cap rate is not the only comparative metric there is. Not only can CoC/IRR be used to compare alternative investments, they are also superior to cap rate, so why use cap rate at all?
Investor · Round Rock, TX · Member since 2018 · 24 posts · 14 votes
8y
@Immanuel Sibero, I should mention that I meant the FIRST YEAR CoC return. The return does go up the subsequent years, although very slowly, assuming a 3% annual rise on rents, appreciation and expenses.
Real Estate Broker · Salt Lake City, UT · Member since 2015 · 145 posts · 150 votes
8y
All the prior comments are really good. Because of the growth of the past 6 years from when the Utah market bottomed in 2012, appreciation and principal pay down appear to be the only sane reasons to hold rentals in your portfolio in Utah - because compared to much of the rest of the country, the cash flow is lagging here. But for those with a longer term horizon, I have still been able to find a few SFR and Multi-family deals daily that work quite nicely on CoC and 10-year IRR. PM me if interested.
Rental Property Investor · Draper, UT · Member since 2017 · 26 posts · 12 votes
8y
My wife and I just purchased a single family house here in Cottonwood Heights. We are renting out the top and living in the mother in law apartment in the basement. We will get around a 5% cap rate.
Investor · Round Rock, TX · Member since 2018 · 24 posts · 14 votes
8y
@Dustin Gale, thank you and congratulations to you and your wife. Could you share more about your recent purchase? Size and purchase of the property and size of the unit? How much are you charging for rent?
Rental Property Investor · Draper, UT · Member since 2017 · 26 posts · 12 votes
8y
@Daniel Kokodoko it is a 5 bed 2 and 3/4 bath. We can charge close to $1,875 in rent. It is close to the grocery store, the base of Brighton canyon, and the I-215 entrance. There are also really good schools close to the house. It is about a 15 minute drive to the University of Utah from our house.
Real Estate Agent · Salt Lake City, UT · Member since 2018 · 19 posts · 12 votes
8y
@Dustin Gale congrats on the Cottonwood Heights property. I am looking to do the same thing in the Sandy area. I have a couple of specific questions. Could I PM/email you?
Flipper/Rehabber · Salt Lake City, UT · Member since 2016 · 211 posts · 174 votes
8y
Good job @Dustin Gale for your first income property in cottonwood its a good area. I wish you the best when it comes to the future deals. My wife and I started off with a duplex and are now looking at converting a large property to a duplex in South Salt Lake.
All the prior comments are really good. Because of the growth of the past 6 years from when the Utah market bottomed in 2012, appreciation and principal pay down appear to be the only sane reasons to hold rentals in your portfolio in Utah - because compared to much of the rest of the country, the cash flow is lagging here. But for those with a longer term horizon, I have still been able to find a few SFR and Multi-family deals daily that work quite nicely on CoC and 10-year IRR. PM me if interested.
Do you think the cash flow in this area will change any time soon? My wife and I are thinking of buying a SFR, ;living in the basement apartment and renting upstairs.
All the prior comments are really good. Because of the growth of the past 6 years from when the Utah market bottomed in 2012, appreciation and principal pay down appear to be the only sane reasons to hold rentals in your portfolio in Utah - because compared to much of the rest of the country, the cash flow is lagging here. But for those with a longer term horizon, I have still been able to find a few SFR and Multi-family deals daily that work quite nicely on CoC and 10-year IRR. PM me if interested.
Do you think the cash flow in this area will change any time soon? My wife and I are thinking of buying a SFR, ;living in the basement apartment and renting upstairs.
Hi Brad. Candidly, since I wrote that, things have only gotten TIGHTER in Utah. I think we need a good shakeup in the market, LOL. However, (1) The Federal Reserve will announce their decision on inter-bank lending rates tomorrow and anything goes - although I think it will remain unchanged. (2) Californians (of which I am one) continue to flee the Golden State in record numbers and can buy 2x to 3x the house here for the same money, so I don't see any price declines here soon. Also, a carpet guy I talked to said they are at least 2 years behind in their orders. Also, we are running out of land. Also, people keep having babies. Get the message? (3) The business climate only seems to improve here. So don't be waiting around for a price drop. I see very few price reductions daily here right now.
Your plan to house hack is AWESOME. Living in the basement and renting the upstairs will make the prices and the rents almost irrelevant. You will get an awesome FHA loan with a low rate and after 1 year you can get move out and move on the next one a do it again. But don't stop with the basement. Consider a full duplex or triplex or fourplex after talking with your lender. Let's put this game on the fast-track!