Rental Property Investor · Seattle, WA · Member since 2016 · 36 posts · 6 votes
Hello,
I am looking at buying a 25 unit in Spokane,WA and I am wondering about cap rates. Often times I see sellers saying 8% cap rate (proforma). The property I am looking at needs a lot of work and tenant turnover and thus has potential for upside. However, the property is currently only performing at about a 4.25% cap rate. With putting in the necessary rehab costs and increasing the rents the property could be performing at about 7.5-8% cap rate. The idea would be to refinance at this point and pull out my down payment and rehab costs. Is it crazy to buy at this low of cap rate or do you see this often? I am wondering if I should be buying at a higher cap rate. I have already talked the seller down quite a but for repairs, that I am getting credits for at selling, to cover most of the rehab costs. This will make it easier to refinance and pull out my 20-25% down payment. Any insight you can give on typical cap rates to buy at and increasing cap rates would be great. Also looking for good videos or podcast episodes to listen to on the subject.
Developer · Charlottesville, VA · Member since 2018 · 4k+ posts · 4k+ votes
7y
@Reinhard Kurzen its really up to you. You should buy at what ever CAP rate meets your return requirements. If you are confident that you can get the property to CAP out at 7.5-8% and the market is 4.5-5% that would be a good deal. Of course you have to take into account the time and costs to improve the property and increase rents.
Rental Property Investor · Seattle, WA · Member since 2016 · 36 posts · 6 votes
7y
@Greg Dickerson, thanks. I see a 28 unit on the market right now advertised at a 5.7% cap rate and a 90 unit advertised at a 6.4% cap rate. However I dont see much value add on these deals as they are more turn key so it would be hard to refinance and pull out the down payment to reinvest it.
Rental Property Investor · Honolulu, HAWAII (HI) · Member since 2011 · 4k+ posts · 2k+ votes
7y
Most of those people will invest off cap rates because that is supposedly based off NOI or income minus expenses.
Most times brokers/sellers will completely BS the Income and expenses to get whatever NOI or Cap you want. So I don't even bother using it as a first search criteria cause its all made up anyway.
Investor · Spokane, WA · Member since 2016 · 73 posts · 37 votes
7y
@Reinhard Kurzen I just started looking at Spokane market. I’m still a newbie and trying to learn all the ins and outs of this niche. Last week I reached out to a broker in Spokane and got financials on a listed property. Will run the numbers and see how this works out. What parts of Spokane are you looking into ? I’m trying to understand the city. Good/bad, stable neighborhoods and other data.
Rental Property Investor · Member since 2019 · 407 posts · 267 votes
7y
As Lane mentioned, cap rate should not be your primary focus. You should be looking for what value you can bring to the property and how the market will respond to that.
Rental Property Investor · Seattle, WA · Member since 2016 · 36 posts · 6 votes
7y
@Seth Ferguson and @lane kawaoka, thanks for the advice. I have estimated these cap rates myself. If course the seller way over estimated the cap rates on rents that are not achievable and did not include cost for repairs to achieve higher rents. If I am able to get it to a higher cap rate do you see this as a good strategy in order to refinance and recover my down payment? The BRRRR method but on a larger scale.
Specialist · Tampa, FL · Member since 2012 · 933 posts · 492 votes
7y
@Reinhard Kurzen, I wouldn't get hung up on cap rates. Will you be using leverage/debt from banks? If so, the key metric you should probably pay attention to would be the CoC return. Majority of investors I know want to know if they put their money into a deal, how soon can they get it back. The CoC return is a good measurement of that. IRR is another good metric as well. If you're taking a look at a value add as you improve the property the cap rate will improve as well. Across the board all over the country, cap rates are down. Hope this helps. Good luck