How Do I Find What's the Cap Rate for my Area? (NY)

Question

I have a question for the buy and hold investors,

We decided to start looking for a small multi-family in the NY area (Bronx, Brooklyn, and Westchester) to keep as a rental property. We are studying every day about it and we are working on our budget these days as far as the down payment and a loan.

My question is how we can find out what's an average cap rate? I know that it changes from an area to an area and probably from a neighborhood to a neighborhood, but is there a formula, resources to look at, etc.

Any help will be great, thanks!

Che Chiu Wong · Answer

@Roy Assaf To keep it short, you need to find out the 1) income, 2) expenses and 3) how much you will buy at.  It is Yearly(Income - Expense) / Purchase Price.

1) Income - In the old days, you will need to go ask some agents and/or go to MLS (Multiple Listing Service, the "database" for agents to look for rental listings) as to how much the rent your neighborhood is.  Now Craigslist is your friend.  (Especially in large cities like New York City)

2) Expense - A lot of estimates.  Work out the numbers as examples and you should be able to spot patterns.  Real Estate Tax, Estimated Vacancy, Maintenance, Property Management Fee, Insurance are your bigger items.  Then, sum up all the expenses and compare with the total rental income.  That number will be your Expense Ratio.  Make a note of that number.  Work through a few (or dozens) listings and you should see what the general number is.

For example, in my area the expense ratio is roughly at 50%-55% (meaning for every $2, $1 - $1.1 goes to expenses, I left with $0.9 to $1 in my pocket).  Different property will have different ratios, but in a given neighborhood, you will be surprised how consistent this ratio is across properties.

3) How much you buy at - look for sold listings in your area.  Again, in large cities the prices are very transparent and by looking through sold listings (don't trust Zestimates, but Zillow sold comps are good), you should be able to get a feel of the prices in no time.

Shameless plug here.  But I wrote an article as to how to calculate the cap rate.  Much more detail than above.

How to Calculate Cap Rate

Roy Assaf · Answer

Thanks everybody, this is really helpful!

@Josh Bakhshi is 14% your minimum? I'm just wondering if you have a number you work by or a window, for example you look for a cap rate between 12-16%.

@Bob Bowling  great links, thank you!

Barbara G.thanks for all the great information and knowledge!

Account Closed · Answer

But since the cap rate reports the market value of the NOI it would be very important to know so you maximize your cash flow by not overpaying for NOI.

Account Closed · Answer

The NOI on the sold listings.  Without that you have no cap rate comp.  I also never said it made little sense to get a cap rate comp.  I said you probably couldn't get one.

Account Closed · Answer

The problem with your explanation is that you are creating a cap rate by assuming a purchase value without knowing what the market cap rate is.   So if you pay $400,000 for $32,000 NOI then you have created an 8% cap rate comp.  But since the actual market cap rate may be 10% then you just paid $80,000 TOO much for your $32,000 NOI.

Of course it is difficult to get a cap rate comp on SFR's and small Multi's so it doesn't make any difference since if you don't have cap rate comps you can't use a cap rate.

Che Chiu Wong · Answer

A bit unclear. If we are looking at sold listings (houses that are sold), which step did we assume the purchase value?

Like you said, in some markets it makes little sense in getting a cap rate comp (very nice neighborhood SFRs).  In @Roy Assaf's case, cap rate should have some meaning.  (Bronx, Brooklyn at the very least)

Account Closed · Answer

http://www.pwc.com/us/en/asset-management/real-est...

http://www.korpaczra.com/valuations/

http://www.freddiemac.com/multifamily/pdf/mf_prope...

Barbara G. · Answer

Wow there is such a big difference between the Bronx and Westchester.  They just are world's apart.  I have lived in both places.   Most of the Bronx is much more affordable then most of Westchester.  I think you just have to settle on an area and explore it.

To me, The most important thing is the cash flow.  Join a local Real Estate club in the area that you want to buy in and/or invetigate and you will know all these answers almost immediatly.  Attend some Real Estate Clubs and some Real Estate Meet Up Groups and keep us posted and share your iformation.

Good Luck.

Josh Bakhshi · Answer

I dint know the new York area, but we usually want at least 14 cap. I don't think that is realistic for ny

How Do I Find What's the Cap Rate for my Area? (NY)

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