What is a good yield/cap rate?

9 Replies

Hi all,

So I've been scanning BP for an answer to this, and it seems that a good yield would be in the mid-teens and a good cap rate would be 8-12%. Can I confirm this with fellow BPs?

(I'm aware that obviously these numbers would depend on your area etc, but I'll looking for a target for these figures). 

"Good"?  

It depends on what kind of investor that you are.  Will you buy and hold? Use a property management company? Add value? 

Cap rate is just one component.

Are you talking residential, commercial. multifamily??

Buying something completely vacant, 50% occupied, fully stabilized??

What asset class you are buying and if paying cash or getting financing determines yield to a degree. Your question is just way too open ended.

Are you buying local where you live or as a foreigner here in the U.S.??

You could buy at an 8 cap but because of the project have a loan at 7% interest for financing because of the type of project putting 35% down.  Conversely you could have bought a property at a 6.5% cap rate but get an interest rate of 4% putting 25% down. 

One is a lesser cap rate but has better financing with less down. The one at 6.5% cap could also have stronger annual rent bumps built into the lease. The one with the higher cap rate with less initial yield might be a turn around project that has more equity upside down the road and rental increase with lease up along with cap rate compression.

Would you go recourse or non-recourse?? If you are worth 10 million putting 1 million down on a project if it goes south you could still be okay and recover your losses over time with other projects. If you were recourse having 3 million in debt for a personal guarantee would not be fun and could stifle investing for years to come. 

My clients are hitting 8 plus caps with strip centers and debt in the 4's fixed for 10 years with 30 year amortization non-recourse. Cash on cash is about 15% pre-tax but can push to 19% if you opt for the first two years to be interest only on the loan. CMBS loans are more expensive than regular loans. Pluses and minuses to everything.

Everything is variable which is why investing is on a case by case basis. 

I'm planning to become a  buy-and-hold investor, focused on buying single family homes with a 20% down payment. Yes, I would be using a property manager. 

London SFR yield around 4%, which is awful in my opinion. Over here I would have to invest for the sake of appreciation rather than cash flow, which is not the territory I want to be treading on.

Originally posted by @Account Closed :

I'm planning to become a  buy-and-hold investor, focused on buying single family homes with a 20% down payment. Yes, I would be using a property manager. 

London SFR yield around 4%, which is awful in my opinion. Over here I would have to invest for the sake of appreciation rather than cash flow, which is not the territory I want to be treading on.

Here's some reading to educate yourself on the different rates. Also notice that they are not appropriate for SFR's.

http://www.propex.com/C_g_capvs.yld.htm

Thanks for all the input!

I wouldn't do a SFR deal unless is earned a CAP of 12% minimum. I'm in Atlanta, Ga and deal with lesser desired areas. I don't use a property manager either.

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