Acceptable Cap Rate?

24 Replies

Wondering what everyone's lowest acceptable cap rate on rental properties is in this market? 8% cap? 10% cap? More? Less?

I Understand that it more than likely varies, and is based on many different factors (type of property, type of renters, part of the country,  maybe it has more potential for higher resale than I could generate in rents? the list goes on),

But just curious at what people are seeing these days with all the chaos in the market, rising property values (and rents), potential for non paying renters, eviction laws, ect. 

Still getting the same returns you used to? Better? Worse?

I'm curious concerning all types of properties across the board, so don't be shy, throw your numbers out there!

-Kalin

I think the question is can you make it work in the next year or three. Places like Spokane are strong candidates for appreciation. It's a great town, still affordable in context. I like Spokane! I would try and get Class A tenants in there. Renovate if needed. One way I consistently see getting great returns, across the board, is by adding ADU's/additional units/semi long term furnished/STR when possible. 


-Z

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Originally posted by @Greg Scott :

An 8 Cap is a mythical creature akin to the loch ness monster or a unicorn.

SE Mich here too. You know whats funny though, I knew too many people on the West Coast, where I used to live, that imagine this is the land of cashflow. 8 caps on every corner for people willing to invest out of state. 

Originally posted by @Zambricki Li :

I think the question is can you make it work in the next year or three. Places like Spokane are strong candidates for appreciation. It's a great town, still affordable in context. I like Spokane! I would try and get Class A tenants in there. Renovate if needed. One way I consistently see getting great returns, across the boardis by adding ADU's/additional units/semi long term furnished/STR when possible. 


-Z

Ok! I understand ways to make properties work for now so that in the future they can be profitable, but that doesn't change the way you calculate Cap rate I don't think. It would still be net income/purchase price?  What you are typically seeing in your part of the country/ local area? 

@Kalin Stocker cap rates have compressed greatly as interest rates have decreased. Investors chasing yield have invaded the MFH space. Cheap long term debt allows people to acquire now and wait for appreciation. Many markets are at 3% for prime assets. Only way you get to 8% or 10% is less desirable areas or run down properties with repairs looming on the horizon. 

Originally posted by @David Abbate :

You're just kidding with 8 or 10 cap right? Or do you have a time machine. 

I get that this isn't the norm anymore, I am just looking at a property that is a "sober living" type of rental that has pretty phenomenal returns that I haven't seen in a while. Found myself wondering what everyone else was seeing in other parts of the country? 

Originally posted by @Kalin Stocker :
Originally posted by @David Abbate:

You're just kidding with 8 or 10 cap right? Or do you have a time machine. 

I get that this isn't the norm anymore, I am just looking at a property that is a "sober living" type of rental that has pretty phenomenal returns that I haven't seen in a while. Found myself wondering what everyone else was seeing in other parts of the country? 

Seeing 3-5 on small commercial multifamily, SE Michigan, with 5 proving itself a red flag in one way or another every time I dig deeper. As far as acceptable, none of that is acceptable. Probably get more in the numerous blighted areas, but I don't recommend those to anyone. 

There is no acceptable or unacceptable, no good or bad cap rates. The cap rate is merely a reflection of the risk in the asset and market, measured against other assets and markets. 

You can still get 8-10% CAP rates in Metro Detroit, but:

1) Class A is extremely tough to find

2) Class B is difficult to find Turnkey. Otherwise, count on some rehab.

3) Class C is plentiful, but much of it is C-minus, borderline D. You need an experienced team you can trust, not to sell you crap to get a commission.

Can't tell you how many owners we've taken over their properties from previous PMC's, who were SHOCKED when we showed them video proof their purchases were Class C or D:( Three have sued their previous "turnkey" PMC's.

Hey, just came up with this: Take the "N" out of Turnkey and you get Turkey.

Any idea what the N could stand for?

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Originally posted by @David Abbate :
Originally posted by @Russell Brazil:

There is no acceptable or unacceptable, no good or bad cap rates. The cap rate is merely a reflection of the risk in the asset and market, measured against other assets and markets. 

 Spoken like a Realtor. 

 99% of Realtors have zero idea what a yield risk premium in financial analysis is. Im guessing you dont grasp it either with the comment. 

Cap rates of course don't really mean squat in the residential space.

I strive to buy above and sell below the market cap for my specific asset type, class and neighborhood. My 'target' is  better than market. 

The market cap for a specific asset of mine and others like it nearby is 5%. I received an offer yesterday at an actual 3.8. Worth reviewing.  What the what is going on. 

If my market cap was a 3, I wouldn't bother.  Know your market cap. 

I'm buying a portfolio in PA that's a 12.4% cap when full (there are currently two vacancies). That's going off the sellers' numbers (I feel like I can get costs down some though there will be some rehab costs no doubt - though rents will climb due to the improvements). 

The properties need work to varying degrees but as mentioned I know I can get higher rents after I do some work. 

I'm a 2% rule lover (I know some BPers like to bag on the 2% rule but I don't care) and this property is currently at just over 3%. 

This market was offering value-add properties meeting the 2% rule a few years back (2016, 2017 and earlier) if one looked hard enough and ran the numbers. Now a lot of properties are barely meeting the 1% rule and some of these still need work. Inventory is low and sellers are throwing silly prices at the wall to see what sticks. 

When I saw this portfolio I thought that price is actually good and I called the seller that day - only a few hours after it was listed. 

I'm looking forward to improving the properties and the rents. The properties are in a C-class area - I like the area - and I'm thankful I was able to make a deal with the seller. It's a wonderful thing when both sides are happy.

@Greg Scott Correct. But I believe they will come back. I’m buying on a different strategy these days with pretty much everything is a redevelopment. I’ll swoop back in at higher cap rates when many of these recent buyers taking down 5% and lower caps go belly up! It’ll happen and in the not too far future.