What is a good Cap Rate for a rental property

Question

I am trying to evaluate a property, and I'm curious what many call an ideal or excellent cap rate for a rental property. Is it 8%?

Josh Green · Answer

Just like other general "rule-of-thumbs" (1% rule for example), there is a general MINIMUM cap rate to quickly determine if a property is likely NOT a good investment. A cap rate below the interest rate of your loan, for example, is generally a bad investment that won't cash flow. Historically, most investors aim for the golden 10+% cap rate for LTRs. That has become increasingly difficult to obtain over the years as the yield on REI has trended downward for over a decade. Although a useful tool, it is sometimes useful to look at other metrics as well, especially on smaller MFRs such as COC return as mentioned above. Depending on the investor's situation, it's best to (in my opinion) take into consideration all the factors by laying out the projected 3-10 yr plan of investing in subject property vs another vs investing in something else vs not investing in that moment at all. Sometimes people over-analyze a "good deal" in the chase for the "perfect deal" leading to a mindset of "timing the market > time in the market" which is not a long-term wise mentality when investing.

Patrick Drury · Answer

@Andrew MichaudFor small multi-family, typically you would use COC instead of Cap rate.

Immanuel Sibero · Answer

@Andrew Michaud

I would be interested in performance metrics such as Cash on Cash, Annual Cashflow, IRR, even the good old 1%/2%. With current such current technology as Google sheet, Excel, these metrics are easy to build and calculate.

Cap Rate (i.e. capitalization rate) is a valuation metric, not a performance metric as such it is a terrible metric to use to determine which property performs better/best. Also, cap rate is determined by the market. It is a measure of how investors view the desirability (or lack thereof) of a particular property in a particular market. It is more of a measure of investor sentiment (i.e. bullish/bearish) of a certain market. Cap rate is even less relevant when evaluating residential properties such as single family homes, duplexes, triplexes and fourplexes. It is a metric used in the commercial space.

So what's a good cap rate? Well there really is no such thing.

Cheers... Immanuel

Amin Akhmadi · Answer

@Andrew Michaud

Andrew, for your first deal look at the long term resail potential for the property ( location) , and cash on cash return, meaning in how many month can you return your innitial investment, so you have enough power to invest in other things after that.

Because think about that. After you returned your money, the investment (for you), is free to retain.

Best deals, off course would not need any money to put down, as they have enough built in equity to even cash out refinance and put money into your pocket.

Feel free to connect and message. Good luck

Joshua Messinger · Answer

Hey @Andrew Michaud!

Please send the property's info as it depends on the type of property you are looking at as there are different rates for different types of properties. (for example SFH used as an STR would have a different ideal cap rate than 8 units used as LTR)

Also, I would recommend stopping thinking in terms of percentages and starting thinking of how much cash you are putting in and how long it would take you to get that cash-out. The whole name of the game is time and how fast you can recoup that initial seed investment you make and reinvest it into something that will double your cash flow.

I'd love to help out more! Feel free to message me and we can go into things in a more detailed way!

All the best,

Josh

Austin Johnson · Answer

well. where is it? when are you buying it? what type of return are you wanting? are you all cash or financing?

What is a good Cap Rate for a rental property

What is a good Cap Rate for a rental property

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