What is the cap rate in your city?
Investor · Phoenix, AZ · Member since 2018 · 420 posts · 388 votes
For those of you who have done a deal recently, I’m curious what the cap rate is in your city.
City?
Single Family or Multifamily?
Cap Rate?
Property Class?
Purchase Price?
I’ll go first:
Phoenix
Single Family
6% Cap
Class A
$375k
@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?
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?
Interesting discussion! Food for thought.
"Like it our not, it is industry standard and convention to assess profitability using cap rates."
If cap rate was a measure of profitability, then unprofitable investments (there are many out there) would have negative cap rate, wouldn't they?
"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?"
Well? Would they stop at zero? Are you saying there is no such thing as negative cap rate? :-)
Cheers... Immanuel
Hey @Immanuel Sibero! There are a few ways to conceptualize cap rates - mathematically it is just (some version of) NOI or Value; economically it is the price point that matches supply and demand of capital to invest (more capital to invest -> values go up -> cap rates drive down to competition). I wouldn't consider a negative cap rate as a thing. I suppose you could have a goin-in cap on in-place rents that reflected a negative NOI...but that wouldn't really represent a market value for the asset. Capital would not be purchasing a negative return. What they would be buying is what they believe stabilized market NOI is. At least that is the way I see it!
I'm not sure if I understand, so I probably don't!
If someone is buying at a 5 cap because they are anticipating a 10 cap, and they're going to rehab and force appreciation, or are in a strongly appreciating market due to rising rents, that's great. But I do not anticipate rising rents or appreciation (except on ones I am rehabbing but that's not all for them) so if I want a 10 cap, I buy one like that or pass on the deal. (Cap rate isn't my only factor, just using the 5 and 10 cap from your example.)
@Account Closed
To answer your original question on my last rentals:
I bought 2 mobile homes from one seller, both were on their own lot, so it was really 2 different properties, but one transaction.
Wasilla AK
$75,000 for both.
Property class was uh, mobile home... reasonable condition but if I had to class it probably B- or C+?
Cap Rate of 16.5% (not used much outside of commercial but I still like it on my spreadsheet)
ROI of 289% (I didn't put any money down at all, just some closing costs, so that number looks way higher than it would if I would've put money down) That's after accounting for 10% vacancy, 10% maintenance and 10% management, though I self manage and generally have less than 10% for vacancy and maintenance.
Single family homes around here do not cash flow well or have good cap rates if you pay market rates and get market rent. But four plexes can do ok and you can do well buying broken stuff. Our immediate area (within 45 minutes or so) doesn't have a lot of multi family over 4 units though there are some.
@Whit B. Is it really 6% including all maintenance and other costs?
Interesting discussion! Food for thought.
"Like it our not, it is industry standard and convention to assess profitability using cap rates."
If cap rate was a measure of profitability, then unprofitable investments (there are many out there) would have negative cap rate, wouldn't they?
Cheers... Immanuel
As a book smart thumper I think the point was that cap rates do not measure profitability. They measure value so there are no negative cap rates. A .001% cap rate would mean that investors have paid $1,000 for each dollar of NOI.
Yes that was exactly the point. Cap rate is not a performance measure nor is it a profitability measure (although this does not stop many investors and agents alike from using cap rate as such). The other point is there is no such thing as negative cap rate because there is no such thing as negative value. Even a negative NOI (i.e. effectively an NOL- net operating loss) coupled with a positive cap rate will NOT result in negative value.
Cheers... Immanuel
For small multifamily (3-8 doors), 7 is the CAP rate # for decent areas in town.
Anchorage, AK
How can there not be a negative cap rate? If expenses exceed rental income on average, then you would be losing money even if you had bought the property all cash, and so your cap rate would be negative. Such a property might be exceedingly rare or nonexistent on the market, but it is at least theoretically possible.
Also, I believe the formula for cap rate is NOI/Capital* 100%, so if NOI is negative, cap rate should be negative by definition.
Hey @Immanuel Sibero! There are a few ways to conceptualize cap rates - mathematically it is just (some version of) NOI or Value; economically it is the price point that matches supply and demand of capital to invest (more capital to invest -> values go up -> cap rates drive down to competition). I wouldn't consider a negative cap rate as a thing. I suppose you could have a goin-in cap on in-place rents that reflected a negative NOI...but that wouldn't really represent a market value for the asset. Capital would not be purchasing a negative return. What they would be buying is what they believe stabilized market NOI is. At least that is the way I see it!
IMO, there is really only one way to conceptualize cap rate ("Capitalization Rate") which is a mechanism to arrive at some value using some measure of income. This is why this mechanism is called the "income approach". The wise men before us had quite a few types of "incomes" to choose from for this purpose (i.e. gross income, gross operating income, net operating income, net income). In their infinite wisdom, the wise men chose "net operating income" as a starting point in their quest to arrive at this elusive "value". They then said "hold my beer" and applied some "rate" to their chosen "net operating income" and like magic they arrived at a value. So they called this rate "Capitalization Rate" because well that's what the rate does, it capitalizes a dollar of income into X dollar of value. This is the only cap rate there is! I'm guessing in your terminology it is the one you conceptualize "economically".
As for the other cap rate conceptualization you mentioned (i.e. "mathematically" driven), this is the one that causes so much misconceptions with new investors. This is the one that many incorrectly use as a measure of performance. This is the one that can go negative when NOI turns into NOL, and all of a sudden you got yourself a negative cap rate in your hand. This cap rate SHOULD NOT be used for the simple reason that many confuse it with the cap rate mentioned above (i.e. in your terminology, the "economically" driven cap rate). Having said this, I do think there is some benefit in calculating NOI/Original Cost of a property. You can compare this metric across multiple years, you can also compare it across other similar properties. In many other investment sectors, this metric is called Operating Yield which is a true performance metric. In real estate, it is unfortunate that "mathematically" the formula for this Operating Yield is identical to the formula for cap rate! So people just use "cap rate" when they really mean "Operating Yield".
Cheers... Immanuel
@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?
Joe,
You hit the nail on the head, and frankly, who cares? Sure it's a measurement, but there's SO many other factors, especially in SFHs where I think you and I are. While some of the costs you note that are "buried or forgotten" most SFH investors treat there houses like an investment and take all of those things into account. But, the bottom line is ROI. How much do you make with the dollar you put in? And you temper that with safety, stability and ease of operating it.
And, no, your labor is not free, in fact it's quite expensive. Your time has value.
I could argue to never use cap rate as a big factor in getting a good return on your dollar.
Thanks for the reply @Immanuel Sibero! I am not terribly confused by the concept of cap rates and hope only to provide some clarification for all involved in the conversation. I can only speak from my experience and how we look at it from the shops I was at. Or, perhaps my ability to explain a concept pales in comparison to my ability to apply it (i.e. I'm a crap teacher!).
Try the cbre cap rate survey https://mapping.cbre.com/maps/caprate/app/
@Tyler Bobo wow that’s a great deal, congrats on the win. Most mobile homes in my area are in 55+ communities. Funny enough, I used to live out in Dutch Harbor, AK for a few years. Great people up that way!
@Steve Smith I don't think you can make the argument that cap rate is irrelevant. Sure, it needs some other metrics like COC or IRR to give a complete picture, but it's useful all the same.
Phoenix has become the guinea pig for the single family for rent scenario for several reputable developers. If that’s the trend, I want to get out ahead of it. Plain and simple.
@Jamie Rose thank you sir. Appreciate that feedback.
@Arta Montero yes it is truly a 6 cap including 10% maintenance, 7% capex and 5% vacancy.
@Steve Smith I don't think you can make the argument that cap rate is irrelevant. Sure, it needs some other metrics like COC or IRR to give a complete picture, but it's useful all the same.
Phoenix has become the guinea pig for the single family for rent scenario for several reputable developers. If that’s the trend, I want to get out ahead of it. Plain and simple.
Whit,
Agreed cap rate is relevant, but a lot of folks look at it as if it's primary. We see it a lot in projects that are probably a lot larger than most of us do, large commercial, apartment building, etc. That boarders more as a business operation than investing. Sure, you can have pure investors that supply the money, look at the statements and never get involved with day to day operations.
I could make a case that the bulk of us here make their dollars with SFHs, perhaps duplexes and small apartment buildings. I'm strictly a SFH investor and find there's a lot more things that are more important than the cap rate, one being financing. And, the SFHs really are more of an "investment" than a business. Many of us have houses that we've never touched, and the only management is paying the taxes and spending the rent money. As one gets into the multi family it requires more of a business attitude to run them.
If it is a big thing for you, so be it, I have no issue with that. What ever puts the dollar in your pocket.
@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?
Well Said. I see the cap rate for residential marketed a lot by wholesalers in my market. Usually these are rough area properties that will yield very well on paper, but have a lot of deferred maintenance. Then you run some market comps and realize that its not that great of a deal as presented. But people are biting on those yields.
Its almost easier not to be duped in a multifamily acquisition. The numbers are the numbers.
@Steve Smith I don't think you can make the argument that cap rate is irrelevant. Sure, it needs some other metrics like COC or IRR to give a complete picture, but it's useful all the same.
Phoenix has become the guinea pig for the single family for rent scenario for several reputable developers. If that’s the trend, I want to get out ahead of it. Plain and simple.
Good point. The first time I discovered this trend, I was looking on Zillow at neighborhoods in Phoenix and every house had a past rental listing in x neighborhood. All new builds in the last 5 years. That doesn't happen where I live. Very interesting trend, and in that case, cap rate would be very important, b/c those homes won't trade hands to onwer occupants. Zero emotion, all numbers. More volatile, but an interesting investment and trend.
Every real estate market is different, and I don't know phoenix.
With that said, in my market, rental neighborhoods will always be rental neighborhoods (unless speculation or luck leads to city migrating to that area via gentrification). Subsequently, the houses will not be maintained with the same pride in ownership as owner occupied neighborhoods. In my market, this can be evident street by street. In phoenix, I would imagine, this is not as obvious, because homes are much newer.
In 20 years, fast forward and imagine what those neighborhoods will look like? I'd rather own in neighborhoods where the rentals are only 10-20% of the stock. Much better chance of appreciation via market comps than 100% rentals.
@Steve Smith I appreciate that perspective. I am definitely weary of utilizing cap rate alone to evaluate SFH. I've got 3 rolling here in Phoenix but nothing to write home about as everything is being squeezed and I am rather hands off in my approach as well.
It’s nice to hear the concerns of other investors. Everyone has such a different approach which is why I’m draw to this asset class. At some point I’d love to make the jump to $1M+ MFH but I have no desire to work outside of class A rentals while I’m still surviving off my W2.
The gist that I’m getting from this discussion is that nobody believes anyone is quoting a true cap rate anyway! 😂
Jump to $1M+ MFH? And you might want to think of which way that jump is. Certainly not up. Why not just buy the same value in SFHs?
@Steve Smith I don't think you can make the argument that cap rate is irrelevant. Sure, it needs some other metrics like COC or IRR to give a complete picture, but it's useful all the same.
Phoenix has become the guinea pig for the single family for rent scenario for several reputable developers. If that’s the trend, I want to get out ahead of it. Plain and simple.
Hey Whit, I'm curious about this trend. Are the developers holding the built stock when done or selling individual SFH to mom and pop investors or aiming to sell the whole development to a larger perhaps institutional investor? Just curious who the target owner is.
Also, I guess I saw it implicit in the question but, I always think of cap rate as far more relevant to commercial loans (5+ residential and large dozens of units multi), since the NOI and and cap rate are a key part of the evaluation process for the lender. For 4 and less units, it's simply another number one may or may not look at, and the conventional residential lenders dont care since value is based on comps instead. Anyway, just wanted to mention. Thanks.
@Whit B. Los Angeles MF is trading at 2.95% - 3.95% cap rates. CA has passed several rent control laws in the last 2 years, if you bought a building with some vacancies on a pro forma basis 2-3 years ago, you're likely struggling to achieve it. I think demand has temporarily increased due to Prop 15 in CA, which is going to increase the assessed value of non-residential commercial properties to FMV instead of last purchase price (if it passes, polling suggests it will). This plus COVID is causing a lot of retail and office investors already sales to want to exchange into MF. All banks are still writing loans on MF - not so much for retail and office products over $2.5M because of the uncertainty of future use and lease rates.
@Alex Forest I wish I knew the answer to this question. I can’t imagine why they’d sell to mom and pop investors at that scale. To me it would make the most sense to bring these single family for rent units to market, complete the lease up to a degree and then sell them to a property management firm.
I'd love to see the IRR at stabilization on this model. Time will tell, most are still in the entitlement phase as far as I know.