Northampton, MA · Member since 2017 · 4 posts · 5 votes
Newish investor. I'm in an area of small New England towns, with a few small city areas steadily attracting young professionals and becoming trendy. I'm looking at a three-family on a leafy street with with 80% financing, my cash-on-cash return would be 10%-15%. But the cap rate is only around 2%. Am I crazy, stupid, some combination thereof, or just missing something?
I'm guessing you were just missing something. Financing is a common strategy in investments, it is used to further leverage your return (i.e. realizing a higher CoC from a mediocre Cap Rate). But if you're saying you have leveraged a 2% cap rate into a 15% CoC then either you have extremely cheap financing/mortgage or something is missing the calculation of CoC or Cap Rate or both. So let's see the numbers you use to arrive at those figures.
By the way, cap rate is of limited use in a three-family property. It is normally used in commercial properties, apartments, etc. Anyway, can we see some detail?
Rental Property Investor · Park City, UT · Member since 2019 · 84 posts · 149 votes
7y
Makes sense to me provided you're doing your calcs correctly. Here's an example:
- Property cost is $100k and has a CAP of 2% which means $2k/year return. This assumes you're including debt service as an expense PRIOR to calculating the CAP.
- So, you invest $20k for your down payment and finance the remaining $80k. Your $2k/year return is a cash-on-cash return of 10%.
If those are truly the parameters of your deal then it makes sense you're seeing a 10% CoC return.
Rental Property Investor · Teaneck, NJ · Member since 2016 · 567 posts · 291 votes
7y
@Andy Sirulnik I do not think you should use Cap Rate for properties under 5 units. Those are residential properties, and should be evaluated by comparable properties.
@Andy Sirulnik I do not think you should use Cap Rate for properties under 5 units. Those are residential properties, and should be evaluated by comparable properties.
If you wanna know how much the property is earning then you gotta do the cash on cash return [or cap rate if not financing ] despite the fact that it is less than 5 units. It's a simple way to know how much money you're earning on the money you invested JUST LIKE VANY OTHER BUSINESS. .