Cash on Cash ROI - Cap Rate doesnt make sense

[Ahmad Gul]

Hello,

I have been trying to run numbers in Greater Seattle market and the CAP rate is barely 2%. What am I missing or is it that this market is way too expensive for buy and hold strategy.

I have found a property on MLS for &290k asking. In best case scenario if I can rent it out for $2K a month, I make $1,593 a year. Yes, no kidding.

Is it because the housing prices are too high or am I not looking at the numbers correctly?

Cheers!

[Steve McCrann]

Ahmad, it could certainly be true. Even though rent increases have been strong in most of the country over the last 7 years, appreciation has increased the gap between attainable rents and values. CAP rates are typically used for commercial and multifamily properties and SFR or condos on the MLS are priced based on comps and not investment value so it's very possible you will see many 2% CAP rates.

I will say you probably won't find a great cash flowing deal if it's in good condition on the MLS. Some will comment that the equity paydown should be added back and that is possibly true, but only if your expenses forecasted are EXACTLY right. You also need to factor in three big costs that will happen: vacant periods, make ready expenses, and capital expenses/maintenance of the property over a multi-year hold. .