Cap Rates

11 Replies

Hello BP Community!

I'm a new Wholesaler (no deals yet) who is trying to find out what Cap Rates would be appealing to investors in Tampa, broken down by neighborhoods.  Can someone help me out with this?  I've searched, but can't seem to find this info.

Many thanks!

call local agents who have sold rental properties recently. ask investors at local REIA or meetups.

@Lari A.

You haven't found any information because Cap Rates aren't generally used when looking at residential properties. The cap rate doesn't take into consideration the repairs that need to be completed on the property or the area the home is in. Usually, an investor is more interested in the comparable properties, the condition of the house, and the projected Return on Investment (RIO) the property has to offer. 


-Christopher

Medium 2016 04 25 cp logoChristopher Brainard, Contemporary Property | http://sellnow.vegas | NV Agent # 177490

Originally posted by @Christopher Brainard :

@Lari A.

You haven't found any information because Cap Rates aren't generally used when looking at residential properties. The cap rate doesn't take into consideration the repairs that need to be completed on the property or the area the home is in. Usually, an investor is more interested in the comparable properties, the condition of the house, and the projected Return on Investment (RIO) the property has to offer. 

-Christopher

Thank you for the response, Christopher.  I think that I didn't pose my question thoroughly, as I was really asking about properties for sale that are currently occupied by a tenant.  I've been led to understand that Cap Rate % comes into play in that situation; when a property is already rented and cashflowing as a property is being sold.  It's my understanding that under those circumstances that a potential investor who intends to keep the renter in place would want to know the Cap Rate %, and I'm trying to find out what Cap Rate would be the standard in Tampa and its surrounding areas.

Is my understanding incorrect about Cap Rates regarding cashflowing properties for sale?

Originally posted by @Troy Gravett :
call local agents who have sold rental properties recently. ask investors at local REIA or meetups.

 Thank you Troy -- I will do that!

Originally posted by @Lari A. :

Is my understanding incorrect about Cap Rates regarding cashflowing properties for sale?

The answer, in my opinion, to that question is yes and no. I understood what you meant on your original post, I assumed you were talking about a Cap Rate on a SFR and phrased my answer accordingly.

Cap Rates are very useful in commercial real estate, because direct comps aren't always easy to come by and commercial real estate is generally purchased by investors based on the cap rate. While you can find complexes that are of similar size, units, class, or location, there is almost always variation that needs to be taken into account. Cap Rates are good to compare two properties that are similar, to determine which may be a better investment. Additionally, when you go to sell the property, it is going to be purchased by an investor (not an owner occupant), so the investor is going to be focused on NOI, and the purchase price is likely to be set by the cap rate. Cap Rate to Buy, Cap Rate to Sell.

Everything you said is true and an investor can look at the Cap Rate on a SFR, however, the value of the individual investment in residential is not based on the cap rate, as the value of the property is set by market comps. Since most homes have comps which are very similar to the subject property, an accurate market value can be determined. Since you have that data and you can easily ascertain the other important data from the property (repairs, taxes, maintenance, etc), you have a complete picture of the investment. I would never buy based on a cap rate, because when I sell, I'm going to be selling according to market value. Market Value to Buy, Market Value to Sell.

Example of my thinking: If I buy an apartment building at a 10% Cap Rate and Improve the NOI by $10,000; I've effectively increased the value of my property by $100,000; If I buy a house at a Cap Rate of 10%, when the market value of the home is $100k, and I improve the NOI by $10,000; The value of my property is still based on the comps. If the comps haven't moved, the value of my property hasn't gone up. Why? Because if I try to increase my price, the investor can purchase the same property two doors down for market value. Cap rates can also easily hide a lot of repairs/deferred maintenance as well and can be very misleading. Basically, if you don't take care of your property, your cap rate will be higher . . .. temporarily.


-Christopher

P. S. I hope my math is correct and this information helps - I'm not always the best at doing numbers in my head.

Medium 2016 04 25 cp logoChristopher Brainard, Contemporary Property | http://sellnow.vegas | NV Agent # 177490

Originally posted by @Christopher Brainard :
Originally posted by @Lari A.:

Is my understanding incorrect about Cap Rates regarding cashflowing properties for sale?

The answer, in my opinion, to that question is yes and no. I understood what you meant on your original post, I assumed you were talking about a Cap Rate on a SFR and phrased my answer accordingly.

Thank you Christopher.  That was both informative and thorough, and gave me much to chew on.

I've got a bunch of spreadsheets that I use to thoroughly analyze all of my deals before I pitch them to investors. If you'd like I can send them over your way. More or less if its a rough/risky neighborhood, we shoot for 20-25% ROI for our investors, middle class neighborhoods 12-20% ROI, and higher end stuff $150k+ 5-10%.

Cap Rate is often a misused term in SFR deals.

It is most often used in commercial real estate where value is more driven by rental rates than appreciation which is where residential real estate gets its rate of return on a long term hold.

Originally posted by @Phil Bach :

I've got a bunch of spreadsheets that I use to thoroughly analyze all of my deals before I pitch them to investors. If you'd like I can send them over your way. More or less if its a rough/risky neighborhood, we shoot for 20-25% ROI for our investors, middle class neighborhoods 12-20% ROI, and higher end stuff $150k+ 5-10%.

Phil,

I would be so appreciative of anything that you'd send my way.  Thank you, and I'm looking forward to receiving the spreadsheets and getting more familiar with what numbers would work for potential investors!

Thanks everyone for letting me know that Cap Rate % is not something that I need to be concerned with at this time.

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