What does a cap rate of 7.9% tell you about a duplex?

Question

How do you use this information?

thank you

Ralph Justiz · Answer

The net income the property produces annually is 7.9% of the purchase price.

I.E. if the purchase price is 100K, the property produces 7,900 dollars every year after expenses are paid for.

Matthew Perimian · Answer

Hi Matthew,

Where did you get this Cap rate? Be very wary of listing that advertise Cap rates. Many list agents do not take into consideration all of the costs associated with the property. Make sure you account for other expenses such as capital expenditures, vacancy, utilities and maintenance. BiggerPockets has a great calculator, you can enter in the gross rent and subtract all the necessary items to get a good idea of what your cap rate will be and it will be much easier to understand when you’re plugging in your own numbers.

Nicholas Lohr · Answer

What Ralph said is perfect.

I'd also add that a 7.9% cap rate may also give you some incite into the neighborhood the property is in and / or the state of the property itself. 7.9 is a pretty high cap rate and often the higher the cap rate the lower in class the neighborhood or property.

This isn't set in stone though, more of an overall general theme.  One could get lucky and there are exceptions but usually the higher the cap rate the lower the quality.

Ralph Justiz · Answer

If you're getting a 10.3 cap it sounds like there are some expenses you are not accounting for in your calculation. Maybe you're missing some utilities payments or lawn care or other miscellaneous maintenance costs.

Tchaka Owen · Answer

I recently saw a multi advertised at over 9%; when I ran my numbers, the cap came to a little under 5%.

They often subtract taxes and insurance while conveniently leaving out vacancy, maintenance, utilities and property management.

Jai Reddy · Answer

@Matthew Bruce Bailey

One could be pro-forma Cap Rate (when every unit is 100% occupied), the other Cap Rate could be as-is.

Matt Bailey · Answer

thanks @Ralph Justiz, when I do the math with the numbers provided - I get a different number - 10.3

I got that figure from loopnet - do you know how they calculate it?

What does a cap rate of 7.9% tell you about a duplex?

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