What Cap Rate do you shoot for in blue collar rental markets?

5 Replies

Assuming no significant future appreciation, in a C class area(or whatever class a blue collar rental market is), what's the cap rate you shoot for for a 2-4 plex?

The area I'm most interested in right now is a near Chicago suburb and I think I can get a 10% cap rate if I find a good deal on a distressed property and do a basic no frills rehab to get it rent ready. Since I'm inexperienced im not sure if I'll even be able to get anything that will give me the 10% cap rate, I'm only hopeful I'll be able to find something. Nothing in the area on the MLS right now is a deal that would work for me.

So I guess I have two questions. What cap rate would you shoot for in a stable C class rental neighborhood(they just got a Walmart and a new community center this year). And how much % cheaper than the MLS do you expect to find if you buy direct from a distressed seller?

Thanks in advance.

I shoot for 10%-12% in a "C" neighborhood, 8-10% for "B".

How much cheaper vs. the MLS? I don't know because like you, I rarely find good deals in the MLS (exception is HUD).

By the way, why are you targeting "C" neighborhoods?

But if market cap rates are over ten you all will be paying TOO much.  That's not very smart investing.  You should shoot for better than market but if you don't have cap rate comps or understand them you'll probably make a bad deal.

The term CAP RATE usually is used in commercial transactions. In residential it is more common to use ROI, or Cash on Cash.

@Account Closed  That's good to know. I use cap rate to estimate how much I'll be willing to pay for something without factoring in financing, but I'll start focusing more on coc and roi for these smaller properties.

Originally posted by @Joseph Ball :

The term CAP RATE usually is used in commercial transactions. In residential it is more common to use ROI, or Cash on Cash.

EXACTLY!  If you can't get a cap rate comp (Like most all residential, say under 10-20  units depending on the market) then cap rates mean nothing. Yet everybody is posting about the great crap rate they got on Grandma's doublewide!  LOL!

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