Buying & Selling Real Estate Discussion

User Stats

77
Posts
36
Votes
Wendell Butler
  • Lender
  • Worcester, MA
36
Votes |
77
Posts

Finding/Calculating CAP Rates in Different Areas

Wendell Butler
  • Lender
  • Worcester, MA
Posted Jan 22 2022, 09:34

Hello everyone!

How do you all calculate the CAP rates for different areas? Are their specific websites you use? Or connections you have? I am trying to run numbers for a commercial 7-8 unit property BRRRR and I have asked around to get an estimated CAP rate of the area, but it's hard to find a specific number to use for calculations.

Let me know your thoughts!

User Stats

49
Posts
9
Votes
Replied Jan 22 2022, 14:33

Great question,  Following

User Stats

77
Posts
36
Votes
Wendell Butler
  • Lender
  • Worcester, MA
36
Votes |
77
Posts
Wendell Butler
  • Lender
  • Worcester, MA
Replied Jan 25 2022, 09:09

Bump, does anyone have suggestions??

User Stats

77
Posts
36
Votes
Wendell Butler
  • Lender
  • Worcester, MA
36
Votes |
77
Posts
Wendell Butler
  • Lender
  • Worcester, MA
Replied Jan 28 2022, 07:43

BUMP

User Stats

241
Posts
167
Votes
Barry Ruby
  • Developer
  • Boulder, CO
167
Votes |
241
Posts
Barry Ruby
  • Developer
  • Boulder, CO
Replied Jan 28 2022, 09:05

Hi Wendell, cap rates are influenced by geographical area, however they are in my experience deal specific. YOUR acquisition Cap Rate is the one that meets the target UN-LEVERED cash on cash return you set for yourself. If you intend it to be "real", it needs to meet cap rates that are currently happening the market area of a given property. 

For Instance, if your target cap rate is 8% in markets like Hawaii or California (where they are in the low single digits) you'd be well advised to spend your time banging your head against one of the walls of the subject property than expecting to actually find something that meets your target rate.

User Stats

77
Posts
36
Votes
Wendell Butler
  • Lender
  • Worcester, MA
36
Votes |
77
Posts
Wendell Butler
  • Lender
  • Worcester, MA
Replied Jan 28 2022, 09:16

Thank you, that makes sense. It would be nice if there was a platform or website that has cap rate information regarding the geographical area. There is not a lot of inventory now where I live to do your own calculations. Also when they were last sold, the appreciation and prices have changed a lot. So it's hard to grasp a cap rate where I have this property (Northeast CT).

User Stats

868
Posts
1,058
Votes
Jon Schwartz
  • Realtor
  • Los Angeles, CA
1,058
Votes |
868
Posts
Jon Schwartz
  • Realtor
  • Los Angeles, CA
Replied Jan 28 2022, 11:20
Originally posted by @Wendell Butler:

Thank you, that makes sense. It would be nice if there was a platform or website that has cap rate information regarding the geographical area. There is not a lot of inventory now where I live to do your own calculations. Also when they were last sold, the appreciation and prices have changed a lot. So it's hard to grasp a cap rate where I have this property (Northeast CT).

If you're BRRRRing a small multifamily, cap rate numbers won't be so meaningful.

Cap rate is a measurement of yield from net operating income, so it assumes the property will be operated similarly from seller to buyer. This is generally the case with large multifamily (say, 40+ units) operated by a professional property manager. There is often opportunity to same expense on the margin and raise income through turnover, but comparable 100-unit buildings in any market will cost about the same to operate (roughly speaking).

This is where cap rate is meaningful.

When you get to less than 10 units, and when you're talking about a BRRRR project -- by which I assume you mean a re-positioning -- cap rate just isn't as meaningful a metric.

I'd look at recent sales in the area and crunch numbers based on these metrics:

- cost per unit

- cost per square foot

- cost per dollar of gross income (this is called GRM, gross rent multiplier, and the equation is: Purchase Price / Gross Annual Income = GRM)

This will give you a sense of where the market is and what you can hope to achieve when you reposition your building.

Is this helpful?

Good luck!

Jon

User Stats

77
Posts
36
Votes
Wendell Butler
  • Lender
  • Worcester, MA
36
Votes |
77
Posts
Wendell Butler
  • Lender
  • Worcester, MA
Replied Jan 28 2022, 19:21

Hello Jon! It is helpful, thank you, but in this area there are not many sales similar to the property I purchased. Also most sales are cheap and all over the place because a lot of investors are purchasing and rehabbing the properties currently. It is a rural town/city that is just rapidly growing and almost gentrifying (I am getting in at the perfect time).

This is a 7-8 unit property and my plan is to buy at a discount (which I am currently, based on the potential of the property), then stabilize to that potential. I am just trying to get a more firm number for after stabilization, which I thought using the cap rate will allow me to achieve. The hard part is finding similar stabilized properties and using the calculations you explained to find the pure "potential". I just want to know around what I will be able to refinance and get a loan for and cash out.

I think the best way to check this is the calculations you stated, but then again most properties are not sold that are stabilized here, a lot are in disrepair. So when I do this it is quite all over the place.

Your calculations you explained are definitely the right way to do it outside of CAP rate, I just think its hard in an area I am in. I've looked at cities closest to this one and have used a general CAP rate I found there. Also I have talked with numerous investors in the area and the cap rate seems to be from 7-8%. But that is a huge margin for calculating a BRRRR!

Either way, I think I am in a good predicament based on the numbers, once stabilized it will be hard for the bank to not want to give me what I think it's worth. I am just trying to learn of better way to do this in rural type areas, cities and urban/suburban areas seem to be easier to calculate these.

User Stats

241
Posts
167
Votes
Barry Ruby
  • Developer
  • Boulder, CO
167
Votes |
241
Posts
Barry Ruby
  • Developer
  • Boulder, CO
Replied Jan 29 2022, 07:00

@Wendell Butler at the end of the day it all comes down to cash flow and appreciation.

User Stats

77
Posts
36
Votes
Wendell Butler
  • Lender
  • Worcester, MA
36
Votes |
77
Posts
Wendell Butler
  • Lender
  • Worcester, MA
Replied Jan 29 2022, 18:03

@Barry Ruby that is very true!