What is the cap rate in your city?
Investor · Phoenix, AZ · Member since 2018 · 420 posts · 388 votes
What is the cap rate in your city?
Most Popular Reply
Rental Property Investor · Sioux Falls, SD · Member since 2015 · 9k+ posts · 18k+ votes
6y@Account Closed generally speaking CAP rate is not a great measure for single family homes. Demand for single family homes is driven more by owner occupied, rather than investor return. CAP rate uses NOI, which is pretty easy to find for larger multifamily or office space. These properties are run like businesses, so they have operating statements. When you get into single family, people often fail to include many expenses when calculating NOI. For example; insurance, taxes, leasing, management, vacancy, CAPEX and even repairs in some cases. You find real estate agents saying Annual Rent is X and they divide by purchase price, then call it CAP rate. Or they just subtract insurance and taxes and consider that all expense. I have even seen agents say things like "they managed themselves so there is no management expense". That is like saying "the owner was a plumber so the plumbing repairs were free".
No problem calculating it for single family, just make sure the number is all-in and be aware many people calculate CAP rate wrong on single family homes. Qualify the data before using it. If CBRE is doing it, you can be sure they are looking at true NOI, but I doubt they would look at single family.
On your property example the net income per month is $1875. What is the actual rent you are charging per month?
71 Replies
- Real Estate Broker · Salt Lake City & Oklahoma City · Member since 2018 · 3k+ posts · 2k+ votes6y
Hey @Account Closed, I chased these down on here regularly for a while and then I stumbled across the quarterly publications that Price Edwards and a few other Institutional commercial brokerages put out and it upped my understanding of the local cap rates and overall investment scenarios 10x.
May they be a blessing to you, too!
- Real Estate Agent · Washington, D.C. · Member since 2012 · 17k+ posts · 30k+ votes6y
3-6% in the DC area.
District Invest Group545 Reviews - Investor · Phoenix, AZ · Member since 2018 · 420 posts · 388 votes6y
@Will Fraser thank you sir. CBRE publishes a similar report for MF here in Phoenix but that’s a huge undertaking to seek out one for each city.
Any other suggestions?
- Investor · Phoenix, AZ · Member since 2018 · 420 posts · 388 votes6y
@Russell Brazil would you say that’s typical of the area over the last couple years or trending in one direction?
- Real Estate Agent · Washington, D.C. · Member since 2012 · 17k+ posts · 30k+ votes6y
Originally posted by @Account Closed:
@Russell Brazil would you say that’s typical of the area over the last couple years or trending in one direction?
Trending downward as prices rise
District Invest Group545 Reviews - Investor · Phoenix, AZ · Member since 2018 · 420 posts · 388 votes6y
@John Erlanger the better question is why you’d waste your thumb energy to respond to something so clearly beneath you....
- Rental Property Investor · Sioux Falls, SD · Member since 2015 · 9k+ posts · 18k+ votes6y
@Account Closed generally speaking CAP rate is not a great measure for single family homes. Demand for single family homes is driven more by owner occupied, rather than investor return. CAP rate uses NOI, which is pretty easy to find for larger multifamily or office space. These properties are run like businesses, so they have operating statements. When you get into single family, people often fail to include many expenses when calculating NOI. For example; insurance, taxes, leasing, management, vacancy, CAPEX and even repairs in some cases. You find real estate agents saying Annual Rent is X and they divide by purchase price, then call it CAP rate. Or they just subtract insurance and taxes and consider that all expense. I have even seen agents say things like "they managed themselves so there is no management expense". That is like saying "the owner was a plumber so the plumbing repairs were free".
No problem calculating it for single family, just make sure the number is all-in and be aware many people calculate CAP rate wrong on single family homes. Qualify the data before using it. If CBRE is doing it, you can be sure they are looking at true NOI, but I doubt they would look at single family.
On your property example the net income per month is $1875. What is the actual rent you are charging per month?
- Real Estate Broker · Portland, OR · Member since 2019 · 4k+ posts · 2k+ votes6y
CapRates are really "soft" numbers since they're reported. Their representative accuracy depends on the 3rd party and what number they used (actual or ProForma) and involvement (seller/buyer or, god forbid, a broker).
Having said that, in Portland proper, 5.5% on REAL numbers. It's gone up with the crazies running the city looking to kill landlords.
Don't laugh, but $/SqFt is usually pretty predictive and linear.
- Investor · Phoenix, AZ · Member since 2018 · 420 posts · 388 votes6y
@Joe Splitrock @Steve Morris
I realize the question is subjective and wide open for error on the side of the operator. I’m hoping seasoned investors who have accounted for maintenance, capex, management, etc appropriately will chime in. Perhaps that’s wishful thinking.
@Joe Splitrock the rent is $2,450
- Rental Property Investor · East Wenatchee, WA · Member since 2014 · 10k+ posts · 16k+ votes6y
In general the commercial market cap rate in my area is 5.5. I can beat MLS listed offerings return handily and with a lot less work in other asset classes like paper equities.
I am a buyer when the market cap for quality is closer to my ROE min of 7. I can still purchase at that, just not on the MLS.
- Investor · Phoenix, AZ · Member since 2018 · 420 posts · 388 votes6y
@Steve Vaughan I agree. Thanks for the feedback. I've had the same debate internally. When I factor in the appreciation that the current Phoenix market is experiencing and the tax benefits my ROI becomes much better than I'm able to find in paper equities at the moment.
People tell me that you shouldn’t count on market appreciation when making these decisions....but I can’t blindly ignore an entire aspect of an investment.
- Flipper/Rehabber · Phoenix, AZ · Member since 2018 · 269 posts · 152 votes6y
@Whit B. Our business model includes appreciation as well. It’s hard to ignore when your in a city like Phoenix.
- Rental Property Investor · East Wenatchee, WA · Member since 2014 · 10k+ posts · 16k+ votes6y
Originally posted by @John Erlanger:
Originally posted by @Steve Vaughan:
I am a buyer when the market cap for quality is closer to my ROE min of 7. I can still purchase at that, just not on the MLS.
Since cap rate is agnostic about financing and ROE is 100% dependent on financing and cap rate values property and ROE measures return how do these meeting at 7 have any actionable meaning?
Whether it's actionable or not for you doesn't matter to me. I don't recall asking your opinion.
As someone in the preservation phase of their financial journey all I said was any less than a 7% return I'll invest in things that require less work. Return meaning IRR, which factors in PP, which factors in cap rate as a return metric.
ROE is dependent on financing? I don't see that, unless to argue that I could put financing on RE at less than 7% to optimize return. But whatever, I buy mostly with cash, but may begin to put financing on buildings as rates trend lower.
- Rental Property Investor · East Wenatchee, WA · Member since 2014 · 10k+ posts · 16k+ votes6y
Originally posted by @John Erlanger:
Originally posted by @Steve Vaughan:
Originally posted by @John Erlanger:
Originally posted by @Steve Vaughan:
I am a buyer when the market cap for quality is closer to my ROE min of 7. I can still purchase at that, just not on the MLS.
Since cap rate is agnostic about financing and ROE is 100% dependent on financing and cap rate values property and ROE measures return how do these meeting at 7 have any actionable meaning?
Whether it's actionable or not for you doesn't matter to me. I don't recall asking your opinion.
As someone in the preservation phase of their financial journey all I said was any less than a 7% return I'll invest in things that require less work. Return meaning IRR, which factors in PP, which factors in cap rate as a return metric.
ROE is dependent on financing? I don't see that, unless to argue that I could put financing on RE at less than 7% to optimize return. But whatever, I buy mostly with cash, but may begin to put financing on buildings as rates trend lower.
Um, I didn't give an opinion. I asked how that was actionable to YOU. If you are just playing with meaningless calculations that is on you. The market must be tanking for some if a simple question is met with such irritable replies!
ROE is your return on equity. Do you know how to calculate that? If you put 99% down or 1% down your equity and financing will change the ROE. Am I wrong on that?
And how is that 7% cap rate a return?
Recently finished AI's Advanced Income Capitalization Course so anxious to use the learning.
Check this out, https://www.biggerpockets.com/...
Thump your little textbook on someone else. I don't want o be mentioned or tagged by you anymore.
- Realtor · Wasilla Alaska · Member since 2019 · 131 posts · 94 votes6y
Hi Brett, appreciation can be huge, but the reason why some folks don’t include it in their business model is two fold: 1) it is very hard to predict when it will end or reverse. Fair to say that rents too can change, so nothing is guaranteed. 2) it’s less useful to people who want or need cash flow. Cash flow, and tax advantages of rentals puts money in our pockets we can see immediately without having to refinance or sell. Of course the mortgage pay down and appreciation are huge wealth building tools long term, most investors are starting out where the cash flow is more important to them now.
I like to make deals that I think will appreciate well, but for my position, it has to be icing on the cake! The cash flow has to stand on its own, even when appreciation has been strong recently (which it has been in my market too, most markets I believe.)
- Rental Property Investor · Henrico, VA · Member since 2019 · 265 posts · 155 votes6y
Originally posted by @John Erlanger:
Originally posted by @Steve Vaughan:
Originally posted by @John Erlanger:
Originally posted by @Steve Vaughan:
I am a buyer when the market cap for quality is closer to my ROE min of 7. I can still purchase at that, just not on the MLS.
Since cap rate is agnostic about financing and ROE is 100% dependent on financing and cap rate values property and ROE measures return how do these meeting at 7 have any actionable meaning?
Whether it's actionable or not for you doesn't matter to me. I don't recall asking your opinion.
As someone in the preservation phase of their financial journey all I said was any less than a 7% return I'll invest in things that require less work. Return meaning IRR, which factors in PP, which factors in cap rate as a return metric.
ROE is dependent on financing? I don't see that, unless to argue that I could put financing on RE at less than 7% to optimize return. But whatever, I buy mostly with cash, but may begin to put financing on buildings as rates trend lower.
Um, I didn't give an opinion. I asked how that was actionable to YOU. If you are just playing with meaningless calculations that is on you. The market must be tanking for some if a simple question is met with such irritable replies!
ROE is your return on equity. Do you know how to calculate that? If you put 99% down or 1% down your equity and financing will change the ROE. Am I wrong on that?
And how is that 7% cap rate a return?
Recently finished AI's Advanced Income Capitalization Course so anxious to use the learning.
Check this out, https://www.biggerpockets.com/...
John, You come across as agitating and provocative starting with your first post. I'm actually interested in this question too, so would like to hear others input...perhaps I dont know enough about this residential commercial space, but so
far dont know how a cap rate wouldn't be one important metric to consider (among others), especially if speaking with a lender.Also, in our area, for higher quality multi residential (perhaps A- to B), I seem to see sub 7% cap rate which seems expensive. Sometimes around 5% (A- @ $750k) which personally sounds awful to me. But there are odd properties, they can be found at much higher cap rates (14%), for some reason in rural areas. But again, I'm not a pro in this space.
Just a 3rd party observation to the discussion.
- Lagrangeville, NY · Member since 2017 · 144 posts · 218 votes6y
A whole lot of people sharing there huge intellect. Id rather just answer the question, I'v been buying at about 10% in poughkeepsie, NY. MLS has it closer to 7%. All residential small multis. 2-10 unit range
- Rental Property Investor · Henrico, VA · Member since 2019 · 265 posts · 155 votes6y
Originally posted by @John Erlanger:
Originally posted by @Alex Forest:
Originally posted by @John Erlanger:
Originally posted by @Steve Vaughan:
Originally posted by @John Erlanger:
Originally posted by @Steve Vaughan:
I am a buyer when the market cap for quality is closer to my ROE min of 7. I can still purchase at that, just not on the MLS.
Since cap rate is agnostic about financing and ROE is 100% dependent on financing and cap rate values property and ROE measures return how do these meeting at 7 have any actionable meaning?
Whether it's actionable or not for you doesn't matter to me. I don't recall asking your opinion.
As someone in the preservation phase of their financial journey all I said was any less than a 7% return I'll invest in things that require less work. Return meaning IRR, which factors in PP, which factors in cap rate as a return metric.
ROE is dependent on financing? I don't see that, unless to argue that I could put financing on RE at less than 7% to optimize return. But whatever, I buy mostly with cash, but may begin to put financing on buildings as rates trend lower.
Um, I didn't give an opinion. I asked how that was actionable to YOU. If you are just playing with meaningless calculations that is on you. The market must be tanking for some if a simple question is met with such irritable replies!
ROE is your return on equity. Do you know how to calculate that? If you put 99% down or 1% down your equity and financing will change the ROE. Am I wrong on that?
And how is that 7% cap rate a return?
Recently finished AI's Advanced Income Capitalization Course so anxious to use the learning.
Check this out, https://www.biggerpockets.com/...
John, You come across as agitating and provocative starting with your first post. I'm actually interested in this question too, so would like to hear others input...perhaps I dont know enough about this residential commercial space, but so
far dont know how a cap rate wouldn't be one important metric to consider (among others), especially if speaking with a lender.Just a 3rd party observation to the discussion.
OK, point me to the agitated and provocative parts. I merely asked a couple of questions. I was met with agitating and provocative replies. I can point them out if needed.
If you are interested in this question may I ask why? You can refer to my questions to the OP if you want. Maybe I shouldn't have said he was a bad investor but I stand by that question. If everyone that replies overpaid for their property then you can see how the information is useless and misleading. Right?
As others mentioned a cap rate is not used to value SFR's and even in the commercial space novices calculate NOI incorrectly.
As far as lenders, they know what the market cap rates are. Unless you are making a huge down payment they will not lend to you if you are overpaying. Are we bros now? Just tell me what you want.
Its captured in your last paragraph. Lenders. If you're looking at a 5+ residential property, the lender will have a number in mind for cap rate. And so should the buyer. As simple as the metric is (or is not), it seems to hold weight. For properties <5 units, agreed, it holds less importance.
As far as being bros, lol, maybe later but not yet sir.
- Lagrangeville, NY · Member since 2017 · 144 posts · 218 votes6y
@John Erlanger
Yes, 10
- Rental Property Investor · Caledonia, IL · Member since 2015 · 290 posts · 213 votes6y
Originally posted by @John Erlanger:
Originally posted by @Steve Vaughan:
Originally posted by @John Erlanger:
Originally posted by @Steve Vaughan:
Originally posted by @John Erlanger:
Originally posted by @Steve Vaughan:
John, you clearly do not understand cap rates and are making assumptions and comments as if you do have an understanding, which is why the hostile responses. In its simplest form it is IRV . Income divided by return = value . in other words income if your NOI aka I ( ASSUMING NO DEBT ) IS 100,000 I DIVIDE THAT BY 7% AKA RETURN ( CAP RATE ) THAT WILL EQUAL V (VALUE ) . In the scenario above your value is $1,428,571 if the cap rate is lowered to 6% value becomes $1,666,667 and so forth . The scenarios above assume A properties thus the lower cap rates. cap rates are calculated with A+ tenants in the commercial world such as Walgreens / Starbucks Target etc... and they are in the 5's depending on lease terms etc... HOPE THIS CLARIFIES . Now onto the question in the QC market in Iowa cap rates are low 6's - in the Franklin , TN market they are in the 5's.
I am a buyer when the market cap for quality is closer to my ROE min of 7. I can still purchase at that, just not on the MLS.
Since cap rate is agnostic about financing and ROE is 100% dependent on financing and cap rate values property and ROE measures return how do these meeting at 7 have any actionable meaning?
Whether it's actionable or not for you doesn't matter to me. I don't recall asking your opinion.
As someone in the preservation phase of their financial journey all I said was any less than a 7% return I'll invest in things that require less work. Return meaning IRR, which factors in PP, which factors in cap rate as a return metric.
ROE is dependent on financing? I don't see that, unless to argue that I could put financing on RE at less than 7% to optimize return. But whatever, I buy mostly with cash, but may begin to put financing on buildings as rates trend lower.
Um, I didn't give an opinion. I asked how that was actionable to YOU. If you are just playing with meaningless calculations that is on you. The market must be tanking for some if a simple question is met with such irritable replies!
ROE is your return on equity. Do you know how to calculate that? If you put 99% down or 1% down your equity and financing will change the ROE. Am I wrong on that?
And how is that 7% cap rate a return?
Recently finished AI's Advanced Income Capitalization Course so anxious to use the learning.
Check this out, https://www.biggerpockets.com/...
Thump your little textbook on someone else. I don't want o be mentioned or tagged by you anymore.
As my Mentor always says, If someone is too smart to answer a simple question then they have given their best answer. Bye, bye.
- Realtor · Lubbock, TX · Member since 2020 · 144 posts · 80 votes6y
I would say SFR rental investments 6-8% for the most part but I have seen some from this past week push up to the 10.8% mark. On the commercial side 5+ doors it can push the 8-12% mark.
I would focus more on CoC ROI and use Cap rate as an indicator of strength/potential value. Cap rate isn't the end all be all but it is certainly something I look at when analyzing a deal.
- Investor · Phoenix, AZ · Member since 2018 · 420 posts · 388 votes6y
@Tyler Bains very interesting. Would you say that 10% is common place for a class C neighborhood in your area?
- Investor · Phoenix, AZ · Member since 2018 · 420 posts · 388 votes6y
@Brian Zaug I appreciate the feedback. Good to see a solid and simple answer without the lecture.
- Real Estate Consultant · Member since 2020 · 80 posts · 102 votes6y
Not sure if mentioned, but there are "cap rate surveys". CBRE puts one out every other quarter, but there are others as well. They address MF in most top tier cities. There does seem to be a "gentle" argument about the efficacy of using cap rates. My opinion is...of course this is a useful metric. Like it our not, it is industry standard and convention to assess profitability using cap rates. On a deal by deal basis, it is best to look at the entire pro forma but yeah. For SFH - cap rates are not really used but GRM is basically the same. Plus, with institutional investors showing appetite for large SFH rental portfolios and increasingly getting into the space...I bet you see more traditional looks at SFH properties (applied to the portfolio).
As far as my city...Colorado Springs...cap rates are too damn low <shakes fist at air>. But don't worry, they have to stop at zero...right?
- Realtor · Lubbock, TX · Member since 2020 · 144 posts · 80 votes6y
@Account Closed actually the one I am referring to is class B as crazy as that is. It is pretty common to see those numbers in class C in our area.
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