Can I still find $100,000 SFRs in Florida with good CAP rate?

Question

David Faulkner · Answer

CAP rates do NOT apply to SFRs, so no, I guess you couldn't. Don't mean to be harsh, but if you explain to an experienced investor that you are looking for a SFR with a good CAP rate then they are going to think you are a joke, an easy target, or both.

Jason V. · Answer

On posts like this one, I find myself missing Bob Bowling.

I think the issue is that you understand the ratio to which Cap Rate applies, but maybe not how it is traditionally applied.

Cap rate is typically used to establish a present value for a stream of revenue within a set market: NOI of a MF property, in real estate. This is done because there can be so many differences from property to property in the MF world (24 units versus 32 units, tenant versus owner paid utilities, etc.) Cap rate is also determined by a market: identical properties in San Francisco and Rochester will sell for wildly different prices, and depending on who you ask, the "better" Cap rate might be 3% or 12%.

Cap rates are typically not applied to SFRs because the primary driver of value/cost for an SFR is not its NOI. If a typical Cap rate for Naples is 8%, and an SFR has an NOI of $3,600, is that house only worth $45,000?

A better way to discuss the criteria you're looking for in the SFR world is to say you're looking for "1% 'Rule'" properties in a certain area, or to tell people you're looking for a particular "Price-to-Rent" Ratio (which, oddly, is calculated using the annual rent, versus the 1% or 2% "Rule" which looks at monthly rent.)

I'm with David on this one: talking cap rates with SFRs is going to make people question your experience. But maybe that's just our markets, and it's typical elsewhere.

In any event, good luck!

Colin G Murphy · Answer

Hi @Alex Balan

This post seems to have gotten a little sidetracked considering your question had nothing to do with cap rates.

The good news is that there are decent 3/2 $100,000 opportunities that will rent for $1000 in Tampa. That niche is more or less my specialty - and I spend every day trying to buy more of them. Some we keep and some we sell post renovation to investors. We have had most success in West Pasco (New Port Richey, Port Richey, Holiday) and Pinellas County (which is a little more expensive).

I would advise to you avoid smaller 3/2s under 1000 sq ft, AE floodzones (expensive to finance), homes with sinkhole prior investigations/repairs, homes near busy intersections and homes near large mobile home parks. If you have enough time you can definitely find deals.

Very best of luck.

David Faulkner · Answer

You can use any definition you like, as can anyone else, and that is fine. However, when you use a definition that is yours and not generally accepted use by professionals, you would look foolish ... this is the case applying CAP rates to SFRs in my opinion and the opinion of many other professionals I've spoken with. It would be ok to say you are looking for a particular ROI IMO.

The only point I am really trying to make with regard to defining what a "good" CAP rate is is that you can lose a boatload of money on a high CAP rate property, and you can make a boatload of money on a low CAP rate property, and visa versa and all points in between. So CAP rate alone, even when applied properly to commercial property, is not really an indicator of total profitability. For example, say you have a 10 CAP property and a 5 CAP property, and that you raise the NOI by $10,000/yr on each. For the 10 CAP property you added ($10,000/0.1) $100,000 in value, and for the 5 CAP property you added ($10,000/0.05) = $200,000 in value, or twice as much for the same amount of work and same change in NOI! So, in this instance, the low CAP rate was your friend and you added $100,000 more in forced appreciation than you did with the higher CAP.

Josh D. · Answer

I'm not sure why cap rates wouldn't apply to single family investments like they do to multifamily.  No one will think you're a joke or easy target if you say "cap rate.".  The term simply refers to the unlevered return on a real estate investment.  A higher cap rate indicates a higher net cash flow.  Saying high cap rates is an indicator of risk assumes the market efficiently prices all real estate (which we know it doesn't otherwise great investment opportunities would not exist).  I've seen low quality properties trade at low cap rates.  It doesn't mean the property is less risky, someone could have overpaid for it and it is actually more risky.

Typically lower cap rates are less risky because typically the market is efficient but not always.  Price is what you pay, value is what you get, there's a difference.  Using a cap rate to define risk is an investment approach that can get you into trouble.  Using it to refer to a property's unlevered yield is perfectly fine.

Jabbar Thomas · Answer

@Alex Balan You have the right idea looking around the corner for deals. The Tampa market is very hot right now. I see plenty of properties under $100k that cash flow on the higher end. I just picked up one for $60,000, put $17,000 into repairs. Now it rents for $1,100 mo; with an ARV of $140,000. I see deals like this all the time. The properties are out there, you just have to keep your eyes open for these deals. Keep us posted on what you find out there.

Josh D. · Answer

@Alex Balan The reason I prefer using cap rates when comparing SFR investments is it represents the operating cash flow of a property relative to the price (assuming the advertised income and expenses are correct which they often are not and require adjustment).  You can use a  Monthly Rent/Purchase Price (1-2%) as @Jason V. suggested and that is not a bad place to start but it doesn't take expenses into account which can vary widely (insurance, taxes, maintenance costs on older properties, utilities, etc).  Ultimately you need to determine NOI and what that income is going to cost you (cap rate).  In making your investment decision you'll need to consider future appreciation (hard to predict), quality of neighborhood, quality of construction, financing available.  I try to be very conservative on future appreciation and prefer to focus on what is readily determinable today, cash flow.

Hersh M. · Answer

@Alex Balan Dont forget to look at the class of the property/area. Also consider if you are open to property that needs repair/rehab.

Mark J. · Answer

YES.

Alex Balan · Answer

Thank you @Colin Murphy!

Can I still find $100,000 SFRs in Florida with good CAP rate?

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