Should I Use Cap Rate or ROI?

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Should I Use Cap Rate or ROI?

Julie Silvestro
Peoria, AZ · Member since 2017 · 27 posts · 6 votes

Hi All,

I would like to play a game inside of the Bigger Pockets forum; nowhere else can I get the opinion of so many valuable industry professionals. The game is what do y'all think is a better word for my marketing purposes? Cap Rate or ROI?

In order to answer that you will need some context:

I am working on some content for a marketing piece, i.e post cards via snail mail. I can't decide if using Cap Rate vs. ROI in the messaging is witty or will disconnect us from our readers.

The post card will be going out to Apartment Owners and I want to illicit the best response possible. What a better way to get real data before we launch then to ask the community!

We are claiming our services can provide up to 60% Cap rate/ROI in most cases. I understand that Cap Rate is basically {Net Operating Income/Property Price} vs ROI is {Net Profit/Cost of investment}.

I feel that since it's not an actual Real Estate Investment but rather a supplement to real estate in terms of NOI, that it may sound weird to use it in this respect.

On the other hand I want to connect to the apartment owners with language they actually use; the problem with ROI is mainly I feel it has less of an industry flare and will not resonate.

There is much more to the post card than the following but this is where we are stuck. Please review the two sentence choices, vote on one and share your rationale.

1) Introducing a Revenue Generating Internet System - You Own it - We Operate it. ROI as high as 60%

2) Introducing a Revenue Generating Internet System - You Own it - We Operate it. Cap Rates as high as 60%.

Also, does anyone have a good reason why I should not use Cap Rate in this context?

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David Faulkner
Investor · Orange County, CA · Member since 2015 · 2k+ posts · 3k+ votes
9y

Definitely ROI ... saying that your service raises the CAP rate demonstrates that you either don't understand CAP rate or are trying to fool those that don't understand, and neither is good. Short of physically picking up a 10 unit apartment complex and moving it to another market, you can NOT change the CAP rate ... if you improve the NOI of a commercial property (5+ units), then you do NOT increase the CAP rate (which is set by the market), you instead increase the value of the property (Value = NOI/CAP). If you are trying to apply CAP rate to SFRs or under 5 unit buildings, and then saying your service will increase CAP, then you are using the term wrong twice.

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  • Julie Silvestro
    OP
    Peoria, AZ · Member since 2017 · 27 posts · 6 votes
    9y
    Originally posted by @Joe Splitrock:
    Originally posted by @Julie Silvestro:
    Originally posted by @Immanuel Sibero:

    @Joe Splitrock

    Now that's a great suggestion - "additional revenue stream.." which is essentially dollar for dollar increase in NOI.

    @Julie Silvestro

    Using Joe's suggestion above, you could actually incorporate "Cap Rate" in your marketing material, or at least in your conversation with the apartment owners. Assuming a 100-unit apartment and a market cap rate of 8%, a $20 per door per month additional revenue stream means you have just increased the value of the apartment by ... <gulp> ... a whopping $300,000. Yeah you're talking their language for sure!

    Immanuel

     We have said this a few times, but I think your right this is definitely a winning analogy to get their attention! Love your thinking here. I think based on your input we will make this line of thinking a mainstay. 

    In the past we have expressed this as a per door increase and let them do the math on total value. For Example Assuming a 8% cap rate, a $20 per door per month increase in revenue stream will increase the value of the apartment by... <gulp>... a whopping $3,000 per door. 

    Considering the cost for a enterprise sytem like ours is around $600 per door, it more than pays for itself just in property value! Which brings me to my second question which I plan on posting in the next few days.... Stay tuned. 

    Thanks for your input

    Julie

    So another detail here is that at $20 per month return, it takes 2.5 years to break even on the original investment of $600. I know you are trying to put a marketing spin on things, but I wouldn't hide the details about the upfront invest and payback period. Is the only option for internet going to be this service or do they have choices. For example if I pay $600 per door in a 20 unit building, is there risk that only 10 units will use my internet? That would change the payback period to 5 years or more. I think what you are offering has good value, but be clear about the risk.

     @Joe Splitrock

    I agree with the transparency idea. We are now working on content to support this concept because of all the great input we received from this thread, so thank you and thanks to everyone who has contributed so far. 

    Clarification:

    I should clarify the numbers so that there isn't any misinformation on this thread. As mentioned we have a suggested retail price for our services to be sold to the residents for $50. Our services average cost is around $20 per unit (Compare at $75 national average) to the owner. Our services are superior, fiber backed WiFi connections and OR we also offer a in-unit 4-port LAN personal WiFi hub that can be fiber backed as well. On average the install is either $10 a month ($0 down Lease) or $600 up front (buy). If you lease than you would in theory be cash positive from day 1 at around $20 a unit per month. If you buy your NOI would be closer to $30 a month, thus your ROI would be closer to 20 months.

    Disclosure: These numbers are averages only, they are based on at least 100 unit properties. For properties less than 100 units these averages do not apply. Prices may vary. Each property needs custom design and engineering work before price is final. 

    To Answer to Your Question: 

    The FCC ruled against exclusivity contracts, so this is not that. Technically the residents will always have choice. However, it behooves the owner and in most cases the residents to use the superior more affordable choice if set up correctly. There are plenty of ways to implement our services and get 100% adoption, we support and consult each owner to custom fit to their concerns. 

    "...Is there a risk that only 10 units will use my internet?"

    Short answer is yes, BUT you have to be smarter than the residents. If you simply try to compete against the local providers you will have a constant adoption rate issue. DON'T DO THAT. 

    So the real question is how do you get every resident to pay for the services (not necessarily use them)? I want to post this question as a new thread because it deserves its own conversation. 

    Julie

    0Reply
  • Joe SplitrockPro Member
    Moderator
    Rental Property Investor · Sioux Falls, SD · Member since 2015 · 9k+ posts · 18k+ votes
    9y
    Originally posted by @Julie Silvestro:
    Originally posted by @Joe Splitrock:
    Originally posted by @Julie Silvestro:
    Originally posted by @Immanuel Sibero:

    @Joe Splitrock

    Now that's a great suggestion - "additional revenue stream.." which is essentially dollar for dollar increase in NOI.

    @Julie Silvestro

    Using Joe's suggestion above, you could actually incorporate "Cap Rate" in your marketing material, or at least in your conversation with the apartment owners. Assuming a 100-unit apartment and a market cap rate of 8%, a $20 per door per month additional revenue stream means you have just increased the value of the apartment by ... <gulp> ... a whopping $300,000. Yeah you're talking their language for sure!

    Immanuel

     We have said this a few times, but I think your right this is definitely a winning analogy to get their attention! Love your thinking here. I think based on your input we will make this line of thinking a mainstay. 

    In the past we have expressed this as a per door increase and let them do the math on total value. For Example Assuming a 8% cap rate, a $20 per door per month increase in revenue stream will increase the value of the apartment by... <gulp>... a whopping $3,000 per door. 

    Considering the cost for a enterprise sytem like ours is around $600 per door, it more than pays for itself just in property value! Which brings me to my second question which I plan on posting in the next few days.... Stay tuned. 

    Thanks for your input

    Julie

    So another detail here is that at $20 per month return, it takes 2.5 years to break even on the original investment of $600. I know you are trying to put a marketing spin on things, but I wouldn't hide the details about the upfront invest and payback period. Is the only option for internet going to be this service or do they have choices. For example if I pay $600 per door in a 20 unit building, is there risk that only 10 units will use my internet? That would change the payback period to 5 years or more. I think what you are offering has good value, but be clear about the risk.

     @Joe Splitrock

    I agree with the transparency idea. We are now working on content to support this concept because of all the great input we received from this thread, so thank you and thanks to everyone who has contributed so far. 

    Clarification:

    I should clarify the numbers so that there isn't any misinformation on this thread. As mentioned we have a suggested retail price for our services to be sold to the residents for $50. Our services average cost is around $20 per unit (Compare at $75 national average) to the owner. Our services are superior, fiber backed WiFi connections and OR we also offer a in-unit 4-port LAN personal WiFi hub that can be fiber backed as well. On average the install is either $10 a month ($0 down Lease) or $600 up front (buy). If you lease than you would in theory be cash positive from day 1 at around $20 a unit per month. If you buy your NOI would be closer to $30 a month, thus your ROI would be closer to 20 months.

    Disclosure: These numbers are averages only, they are based on at least 100 unit properties. For properties less than 100 units these averages do not apply. Prices may vary. Each property needs custom design and engineering work before price is final. 

    To Answer to Your Question: 

    The FCC ruled against exclusivity contracts, so this is not that. Technically the residents will always have choice. However, it behooves the owner and in most cases the residents to use the superior more affordable choice if set up correctly. There are plenty of ways to implement our services and get 100% adoption, we support and consult each owner to custom fit to their concerns. 

    "...Is there a risk that only 10 units will use my internet?"

    Short answer is yes, BUT you have to be smarter than the residents. If you simply try to compete against the local providers you will have a constant adoption rate issue. DON'T DO THAT. 

    So the real question is how do you get every resident to pay for the services (not necessarily use them)? I want to post this question as a new thread because it deserves its own conversation. 

    Julie

    For starters, I don't own apartments but if I did I would be interested in looking into this. I do know someone who rents an apartment and gets internet included in rent. I don't know how the service works but in her case she chooses not to get paid internet because hers is free. Of course it is not really free - it is part of her rent payment. So I don't know how much existing competition you have or how much it varies by geography.

    I am sure for a landlord, this is very much similar to other decisions like including heat or water with rent. It can give you a competitive advantage over other properties, but it needs to be built into the price of rent or billed separately.

    Good luck, it sounds interesting and much like water and electricity, internet has become a required utility.

    0Reply
  • Julie Silvestro
    OP
    Peoria, AZ · Member since 2017 · 27 posts · 6 votes
    9y
    Originally posted by @Joe Splitrock:
    Originally posted by @Julie Silvestro:
    Originally posted by @Joe Splitrock:
    Originally posted by @Julie Silvestro:
    Originally posted by @Immanuel Sibero:

    @Joe Splitrock

    Now that's a great suggestion - "additional revenue stream.." which is essentially dollar for dollar increase in NOI.

    @Julie Silvestro

    Using Joe's suggestion above, you could actually incorporate "Cap Rate" in your marketing material, or at least in your conversation with the apartment owners. Assuming a 100-unit apartment and a market cap rate of 8%, a $20 per door per month additional revenue stream means you have just increased the value of the apartment by ... <gulp> ... a whopping $300,000. Yeah you're talking their language for sure!

    Immanuel

     We have said this a few times, but I think your right this is definitely a winning analogy to get their attention! Love your thinking here. I think based on your input we will make this line of thinking a mainstay. 

    In the past we have expressed this as a per door increase and let them do the math on total value. For Example Assuming a 8% cap rate, a $20 per door per month increase in revenue stream will increase the value of the apartment by... <gulp>... a whopping $3,000 per door. 

    Considering the cost for a enterprise sytem like ours is around $600 per door, it more than pays for itself just in property value! Which brings me to my second question which I plan on posting in the next few days.... Stay tuned. 

    Thanks for your input

    Julie

    So another detail here is that at $20 per month return, it takes 2.5 years to break even on the original investment of $600. I know you are trying to put a marketing spin on things, but I wouldn't hide the details about the upfront invest and payback period. Is the only option for internet going to be this service or do they have choices. For example if I pay $600 per door in a 20 unit building, is there risk that only 10 units will use my internet? That would change the payback period to 5 years or more. I think what you are offering has good value, but be clear about the risk.

     @Joe Splitrock

    I agree with the transparency idea. We are now working on content to support this concept because of all the great input we received from this thread, so thank you and thanks to everyone who has contributed so far. 

    Clarification:

    I should clarify the numbers so that there isn't any misinformation on this thread. As mentioned we have a suggested retail price for our services to be sold to the residents for $50. Our services average cost is around $20 per unit (Compare at $75 national average) to the owner. Our services are superior, fiber backed WiFi connections and OR we also offer a in-unit 4-port LAN personal WiFi hub that can be fiber backed as well. On average the install is either $10 a month ($0 down Lease) or $600 up front (buy). If you lease than you would in theory be cash positive from day 1 at around $20 a unit per month. If you buy your NOI would be closer to $30 a month, thus your ROI would be closer to 20 months.

    Disclosure: These numbers are averages only, they are based on at least 100 unit properties. For properties less than 100 units these averages do not apply. Prices may vary. Each property needs custom design and engineering work before price is final. 

    To Answer to Your Question: 

    The FCC ruled against exclusivity contracts, so this is not that. Technically the residents will always have choice. However, it behooves the owner and in most cases the residents to use the superior more affordable choice if set up correctly. There are plenty of ways to implement our services and get 100% adoption, we support and consult each owner to custom fit to their concerns. 

    "...Is there a risk that only 10 units will use my internet?"

    Short answer is yes, BUT you have to be smarter than the residents. If you simply try to compete against the local providers you will have a constant adoption rate issue. DON'T DO THAT. 

    So the real question is how do you get every resident to pay for the services (not necessarily use them)? I want to post this question as a new thread because it deserves its own conversation. 

    Julie

    For starters, I don't own apartments but if I did I would be interested in looking into this. I do know someone who rents an apartment and gets internet included in rent. I don't know how the service works but in her case she chooses not to get paid internet because hers is free. Of course it is not really free - it is part of her rent payment. So I don't know how much existing competition you have or how much it varies by geography.

    I am sure for a landlord, this is very much similar to other decisions like including heat or water with rent. It can give you a competitive advantage over other properties, but it needs to be built into the price of rent or billed separately.

    Good luck, it sounds interesting and much like water and electricity, internet has become a required utility.

     Thank you for you valuable contrubution

    0Reply
  • Mike Nelson
    Investor · Oak Park, IL · Member since 2014 · 307 posts · 150 votes
    9y

    This sounds like it could be a real good concept. The way I see it is firstly I want to provide my tenants with a little better internet service, more straightforward wiring, no interruptions, no hassle. Secondly, I want to make a few extra bucks a month, not thinking about IRR or ROI. Can I make $20 or $100 a month on a 10-unit? But I have to trust that this system really works. I would have to get referrals from other landlords or see good reviews online. It is like ads from competing cell phone providers. I am not smart enough to decipher their fine print or follow their ads. I talk to others or read reviews.

    1Reply
  • Julie Silvestro
    OP
    Peoria, AZ · Member since 2017 · 27 posts · 6 votes
    9y
    Originally posted by @Mike Nelson:

    This sounds like it could be a real good concept. The way I see it is firstly I want to provide my tenants with a little better internet service, more straightforward wiring, no interruptions, no hassle. Secondly, I want to make a few extra bucks a month, not thinking about IRR or ROI. Can I make $20 or $100 a month on a 10-unit? But I have to trust that this system really works. I would have to get referrals from other landlords or see good reviews online. It is like ads from competing cell phone providers. I am not smart enough to decipher their fine print or follow their ads. I talk to others or read reviews.

     Mike

    I am so happy that so many see the value of this, it truly is like a commodity/utility like water and electricity now. Further, there is a sense that the local services are not that great and like you alluded to, better service is definitely a way to separate yourself from your contemporaries.

    10 unit properties are more difficult when it comes to HIGH RETURNS.  Economies of scale is a big deal in the Internet world, the more users the cheaper the per user cost becomes. FYI: Marginal  profits start at around 20 units. For a 10 unit property your would be closer to break even BUT you can still provide better services as a way to separate yourself from the competition. 

    TRUST:

    I love that you brought that up. That is one of the largest concerns we see. Does it work,? We offer something better than online reviews, we offer a Try-it-Before-You-Buy-It Promise. It has to work or we don't get paid. The other concern we see is in my new thread titled: HOW DO YOU GET 100% ADOPTION FOR A ANCILLARY WiFi SERVICE?

    Thanks for your question and input. 

    0Reply
  • Natalie Schanne
    Real Estate Agent · Princeton, NJ · Member since 2016 · 1k+ posts · 1k+ votes
    9y

    @Julie Silvestro - Think of other businesses vying for an apartment owner's attention and copy what seems to work for them.

    LED / Energy Efficient Lighting - they will advertise it as 50% annual ROI or "2 year payback" with a 10-30 year useful life. i.e. Years 3-30 are 100% profit from the common area electricity savings.

    For increased adoption, many apartment owners will want you to agree to manage / service the system, hardware, and/or billing. Maybe provide an 1-2 year term maintenance / money back guarantee with its cost baked into your initial price. As an owner, I am probably happy with 33% ROI (3 year payback) on a product and no calls or headaches.

    Can I contract with your company to provide the internet service and you just send me checks? (Do you know what, if any, kickbacks or perks I may be getting from Verizon/Comcast/etc.?)

    0Reply
  • JR M.
    Investor · SC · Member since 2016 · 89 posts · 35 votes
    9y
    I am afraid that you are forcing terms that have very specific meaning into your business marketing collateral. If I were selling your services to real estate investors I would be careful to not confuse terms. Rather, I might say what you told the forum... "earn 30/ door to income statement". This achieves another important REI goal of improving the operating income of the property.
    0Reply
  • Julie Silvestro
    OP
    Peoria, AZ · Member since 2017 · 27 posts · 6 votes
    9y
    Originally posted by @Natalie Schanne:

    @Julie Silvestro - Think of other businesses vying for an apartment owner's attention and copy what seems to work for them.

    LED / Energy Efficient Lighting - they will advertise it as 50% annual ROI or "2 year payback" with a 10-30 year useful life. i.e. Years 3-30 are 100% profit from the common area electricity savings.

    For increased adoption, many apartment owners will want you to agree to manage / service the system, hardware, and/or billing. Maybe provide an 1-2 year term maintenance / money back guarantee with its cost baked into your initial price. As an owner, I am probably happy with 33% ROI (3 year payback) on a product and no calls or headaches.

    Can I contract with your company to provide the internet service and you just send me checks? (Do you know what, if any, kickbacks or perks I may be getting from Verizon/Comcast/etc.?)

    Clarification:

    - First let me answer by saying adoption rate means the number of RESIDENTS subscribing to the WiFi service, not the number of property owners buying the service from us. 

    - We offer end-to-end service, so we always manage the operations/service. As you may noticed from this thread is the only portion we don't handle is the billing. This is NOT because we can't, rather because the Apartment Owner is in a unique position to have 90-100% adoption, where we are not. Adding the cost of internet into the rent or into a RUB's is the only way we have seen this work. If we do the billing we just become another provider competing for subscribers, we would be able to get over 60% adoption in most cases but this doesn't leave room for a healthy ROI to the owner. Since the owner will actually own and profit from the Internet delivery sytem she would have an incentive to have all the residents paying, if possible.

    So now to answer your question, the short answer is YES we could do all the billing and pay you a check, however it lacks integrity and would ultimately cause the subscriber rate to drop because we can not force someone to subscribe or pay (residential internet contacts are out of style). The owner on the other hand can bake the cost into rent or the RUB's and thus have a certainty (as certain as the rent being paid at least). As a side note we estimate roughly a 36 month ROI at 85% adoption/subscribers, this should give plenty of wiggle room for those who resist the superior Internet service.

    I "hear" the Big Box Cable Companies pay out roughly 3-8% commissions and provide free TV in the lobby and small perks like that. The problem with this is 1) They are essentially bribing the owner to provide their inferior services. The residents in general HATE the Big Box Companies. 2) The agreement usually add in a strict clause that states that if the subscriber rate falls below X% then you don't get paid your 3-8%. depending on your area this means you are most likely not going to see full payouts, especially with the fact that nearly everyone is "CUTTING" the cable cord.

    Hope this helps

    0Reply
  • Account Closed
    Investor · Hudson, OH · Member since 2016 · 8 posts · 2 votes
    9y

    I know it's late, but for me, if I saw something that said, "Increase your rent per door by $30/month for next to nothing", I would pay attention.

    0Reply
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