Anyone else using cap rates to get purchase price?

5 Replies | Newark, New Jersey

Any other Newark investors using cap rates to back into a purchase price when making offers on small multi-families (2-4 units)? I closed on a duplex in northern Ironbound earlier this spring at a cap rate of 7.5% (incl. of prop mgmt & capex reserves) but starting to look towards other neighborhoods, namely Upper Roseville. Curious what y'all are seeing for cap rates around town... 

There is nothing wrong with using cap rate on 1-4 unit bldgs. (Despite some very strong opinions the the contrary here.) However you need to recognize that is only 1 metric out of many ways to evaluate a property. Also recognize there is an inherent problem with getting accurate numbers on small properties. 

@Russell Brazil  Understood that capex is not an operating expense so technically it should not be included in NOI, I just prefer underwriting it like that to make sure I'm not over valuing a property when looking at it from a cap rate perspective. Of course, a seller would never include it in their cap rate but hey... why should they. I've been tracking a couple other discussions on BP where there's some heated debate on whether capex is above or below the line so not trying to re-hash that here haha

@Ned Carey Very true. It's hard enough getting accurate rent rolls from sellers let alone expenses... 

@Brent Coombs Absolutely using sold comps, maybe to the point of excess sometimes... The 7.5% was the cap when I purchased, and renovations increased the NOI and brought the cap up a couple points. It was my first purchase so definitely learning quite a few things along the way but had to get my feet wet somehow. Regardless, it's cash flowing $650 / month / door after debt & expenses so I can't complain so far.

@Jonah Richard

There shouldn't be any debate on whether or not Capex should be a part of NOI. Any such debate is misguided. The industry came up with acronyms with standard definitions such as GRM, NOI, COC, IRR, etc... etc. so that all industry participants can be on the same "page" when they communicate.

Including Capex in NOI is getting on a different "page" and makes it hard to communicate with others. When running a business (i.e. rental house or a McDonald's franchise) there are "capital" items and "operating" items. These are standard definitions that span to other industries, not just real estate. The standard definition of NOI is Net "Operating" Income, now why would you put "capital" items in something that's clearly defined for "operating" items only?

Wouldn't it get old if every time you tell people your cap rate is X, and they immediately ask you back "Is that including Capex or excluding Capex?"

Food for thought... actually McDonald's sounds good right now :-)

Cheers... Immanuel