Older but in better location vs new

[Lisa Troxel]

I am looking at a 10 plex (2 fourplexes and a duplex) in the an older, built out part of town 11/2 miles from the university built in 96 with a cap rate of 6.1% and a sales price of 650. The other project is new, granite counter tops, garages but in an over built area with a 5% cap rate and the development of 21 four plexes are all being offered for $300 - short sale. I am torn between the more established location with the older buildings and the nicer new buildings. Should I consider the raw land value? Help!

[Jon Holdman]

5% and 6.1% cap rates are too low to be profitable. You make money on commercial from the difference between the cap rate and what you're paying for money. That's certain to be at least 6%. Not to mention cap rates provided by sellers are always overly optimistic. I wouldn't even consider either of these as buy and hold rental deals.

Now, is there some other upside? Fixing up and reselling quickly?

[Lisa Troxel]

The cap rate of 6% is my own calculation based on a list of replacement equipment prices and comes to a little over 10% of the actual rents. Yeah, the seller said 7% cap with repairs so low that I questioned the upkeep and ignored his repair numbers. I also factored in $30,000 in depreciation for this 14 year old complex. Financing will be about 5.75%.