Real Estate Agent · Austin, TX · Member since 2021 · 17 posts · 7 votes
Hello fellow investors!
I am curious to know what cap rate you shoot for on your properties. Do you even use cap rate? Does it change via market? What market are you in? All thoughts and comments are welcome!
Investor · Morrison, CO · Member since 2015 · 221 posts · 177 votes
5y
The asset class is certainly a consideration, along with the condition of the asset, and it's location. If you look at apartment buildings, for example, a class A building can sell for a cap rate in the 4's, a class B and C in the lower 5's, and anything else around upper 5's to low 6's in the Denver market. You have different sized markets and generally the larger and better performing markets will have better terms on loans and subsequently lower cap rates. Higher down payments required and the cap rates will go up a bit. Also, the Triple Net Leases can be a much lower cap rate because there isn't much you have to do except take a check. An apartment building requires more management, and then moving on to what we are doing in the RV Park asset class, the cap rates are even higher because the management is even greater along with a product that generally takes longer to sell as well.
We use Cap Rate as a quick and easy metric to check value on the investment and what the seller is offering, but by no means is it the only calculation we're doing. The amount of investment required along with deferred maintenance or other Capex items that we feel is necessary to get the property into a condition we feel good with, is all calculated in our returns and investor CoC and ROI and IRR.
If you're comfortable getting outside of the Austin market, I'd consider other areas outside of Austin. Of course, right now your appreciation in that market is likely driving down cap rates and increasing investor interest and demand-another reason why cap rates will vary.
Rental Property Investor · Stratford, CT · Member since 2019 · 154 posts · 115 votes
5y
@Jacob O'Connor My general goal is nothing less than 8%. In general, a property with double digit cap rate (10%+) is considered a good investment. Return on investment is also measured Cash on Cash or Cash Flow. A lot of people tend to not take into consideration the equity you are building along the way. I would say use whatever rate works for you and what you are comfortable with.
Investor · Morrison, CO · Member since 2015 · 221 posts · 177 votes
5y
The asset class is certainly a consideration, along with the condition of the asset, and it's location. If you look at apartment buildings, for example, a class A building can sell for a cap rate in the 4's, a class B and C in the lower 5's, and anything else around upper 5's to low 6's in the Denver market. You have different sized markets and generally the larger and better performing markets will have better terms on loans and subsequently lower cap rates. Higher down payments required and the cap rates will go up a bit. Also, the Triple Net Leases can be a much lower cap rate because there isn't much you have to do except take a check. An apartment building requires more management, and then moving on to what we are doing in the RV Park asset class, the cap rates are even higher because the management is even greater along with a product that generally takes longer to sell as well.
We use Cap Rate as a quick and easy metric to check value on the investment and what the seller is offering, but by no means is it the only calculation we're doing. The amount of investment required along with deferred maintenance or other Capex items that we feel is necessary to get the property into a condition we feel good with, is all calculated in our returns and investor CoC and ROI and IRR.
If you're comfortable getting outside of the Austin market, I'd consider other areas outside of Austin. Of course, right now your appreciation in that market is likely driving down cap rates and increasing investor interest and demand-another reason why cap rates will vary.
Rental Property Investor · Austin, TX · Member since 2016 · 317 posts · 257 votes
5y
@Jacob O'Connor I know someone who just purchased a $4.6M complex at 3.2% cap rate....people are throwing good money after bad deals all day long right now!