Real Estate Coach · Robbinsville, NJ · Member since 2017 · 185 posts · 99 votes
I am interested to see across the country who has the best deal for a 2 bed unit. I am talking about the purchase price and cap rate. The unit has to be updated and in a good area. I am not interested in cash flow in run down areas. The unit can be part of a multi, condo, single family. Looking for the lowest price with the highest cap rate for a unit in a top area that is modern.
I have a 135K purchase price for Mt Laurel NJ which I can rent at 1400 for around a 7/8 cap rate.
I'll take a stab. There has been no replies maybe because cap rates are irrelevant in residential properties. There is no correlation between cap rates and price in residential properties.
I am surprised no replies. Who has the best deal in the country. The lowest purchase price for the nicest unit in the best town for the highest cap rate.
I'll take a stab. There has been no replies maybe because cap rates are irrelevant in residential properties. There is no correlation between cap rates and price in residential properties.
Last year I bought one for 36 put in 50 and it rents for $1175 in a good appreciating area. I thought that was good. Going to be very local though. We’ve had clients buy in the 40 range renting for $725 with limited appreciation and they are happy. As always, depends.
I beg to differ Immanuel. While cap rates might only be used in pricing commercial properties, why would you use it to consider residential in your own internal analysis. Net operating income is critical to factor with the ratio of purchase price. If I am looking at similar units or units in different states like I am trying to do, comparing a cap rate is important. I wouldn't invest out of state if I could get the same purchase and income in state.
Last year I bought one for 36 put in 50 and it rents for $1175 in a good appreciating area. I thought that was good. Going to be very local though. We’ve had clients buy in the 40 range renting for $725 with limited appreciation and they are happy. As always, depends.
I guess I wasn't clear in my original post. I am looking for new opportunities out of state. I want an updated condo in a good area for less than what I can get in NJ producing the same cap rate if not better.
I’m suggesting that cap rate is a terrible metric to analyze residential properties across markets because:
Different markets have different fundamentals and different prevailing cap rates. The fact that residential properties are valued using sales comparables as opposed to cap rate comparables further skews the calculated property cap rates in different markets. Everything else being held constant, you would be comparing apples and oranges because a 12 CAP in Indy is not necessarily a better performing property than an 8 CAP in NJ.
Cap rate is a metric calculated using ONE year's worth of NOI. Unless you are investing one year at a time, wouldn't you want to know how the property is expected to perform during your entire holding period?
IMO, a metric such as IRR is far superior and would address the above issues. I realize I'm not really answering your original question. Sorry about that, maybe this should be a different post :-) It's just that I'm faced with the same problem. I'm in the Dallas market that's overpriced and overheated where the deals are not penciling out so I started looking in other markets but cap rates are nowhere in my worksheets.
@Immanuel Sibero Which metric/metrics do you use to evaluate whether a property is worth the investment? Also, what would you consider consider to be a better performing property?
I live in NYC but am looking to invest out of state. A few places I've looked at (not physically but online) are Waco and Trenton. Waco seems like a good area based on my calculation. I use Cash on Cash return. Some properties comes out to be in the 20% range which was shocking to me! Trenton has similar numbers but slightly less profitable.
@Paul Camuto I recently took a trip to Trenton and from what I see, most of the neighborhoods are C, some C approaching B. The areas bordering Trenton and Hamilton might be of interest to you. Hope this helps!
I use IRR which is a metric that's designed to measure performance/profitability. A better performing property is one with higher IRR. But then again IRR only measures RETURN of an investment, it doesn't tell you anything about the RISK associated with the investment. So an investment with the highest IRR is not necessarily the best one if the investment carries higher risks.
Cap rate, on the other hand, is not designed to measure performance/profitability, hence a poor metric at that. Cap rate is more of a valuation metric.
For a 20% CoC in Waco, TX I would question the quality and the demographics of the area (i.e. the RISK part of the equation as referred to above).