Rental Property Return Rate

Rental Property Investor · Everett, WA · Member since 2019 · 24 posts · 8 votes

As a general Discussion, What do you consider to be a realistic expectation for Cap Rate in the area? Or if you use a different ROI calculation what is it and what rate do you expect to get? I see a lot of 6-7% out there that seems low to me.

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Michael HaasBusiness Member

Real Estate Agent · Redmond, 🌧️ Seattle Investor-Agent | 🤑 Helped 400+ Clients Invest in Real Estate | 🏘️ Owns 23 WA Rentals & Airbnbs | 🏗️ Built 5 DADU's | 📈 You Can Do It Too · Member since 2016 · 724 posts · 3k+ votes

As crazy as it sounds, 6-7% CAP in the greater puget sound is actually quite good. Seattle averages in the low 5%s and tacoma in the low 6%s or high 5%s.

That's the current CAP of course, so for those properties (or any property) most investors would be looking to add value and increase returns after purchasing.

[email protected]408-439-7873

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Adrian Chu
Real Estate Broker · Seattle, WA · Member since 2014 · 1k+ posts · 427 votes
6y
Originally posted by @Ric Mittleider:
As a general Discussion, What do you consider to be a realistic expectation for Cap Rate in the area? Or if you use a different ROI calculation what is it and what rate do you expect to get? I see a lot of 6-7% out there that seems low to me.

That's the norm in Tacoma these days.

By the way, I recall getting a few of your letters.

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Ric Mittleider
OP
Rental Property Investor · Everett, WA · Member since 2019 · 24 posts · 8 votes
6y
Adrian,
Yes I have recently started marketing for properties and buyers in the area. we are relocating from San Diego back home. I have a lot of property owners willing to sell but I didn't feel that I could wholesale them because the return would be so low.
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Bryan Blankenship
Investor · Cincinnati, OH · Member since 2014 · 538 posts · 432 votes
6y
@Ric Mittleider We're seeing between 7-9.5% here in Ohio in the A-/B/C+ class areas. It dips down into that 6-7% range for A/A+ class.
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Ric Mittleider
OP
Rental Property Investor · Everett, WA · Member since 2019 · 24 posts · 8 votes
6y
Bryan,
Yes I invest in Nebraska as well and am getting good returns there as well. I have been trying to figure out the expected returns in these more expensive areas. Plus hoping to find some investors that are still investing in these areas.
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Ryan MahoneyPro Member
Rental Property Investor · Hastings, NE · Member since 2018 · 57 posts · 53 votes
6y
@Ric Mittleider I am seeing 9-11%. I invest in Hastings, Nebraska - a small college town. I have been very selective in my purchases and done some forced appreciation so the norm may be a little lower. I would say my properties are C-C+ that are B’s when I am done.
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Austin Steed
Real Estate Agent · Columbus, OH · Member since 2016 · 593 posts · 664 votes
6y
Are all these numbers you guys are running counting tax adjusted?
One thing we're seeing in Columbus OH is that brokers aren't selling anything tax adjusted.
This can make a big difference when running numbers. As the county auditor will see the new sale price.
This may be even more of an issue here because of how hot the RE market is.
For example:
I bought a double last year for 175k. The seller purchased it for 54k in 2016. Big return in 3 years, as it was in similar condition.
My taxes are on that 54k value so I am expecting my taxes to also go up 300%... this changes the cap rate quite a bit.
Just curious if other cities are seeing the same thing or other auditors work similarly.
Thanks!
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Ric Mittleider
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Rental Property Investor · Everett, WA · Member since 2019 · 24 posts · 8 votes
6y
yes I calculate on total net rental. So minus taxes, insurance maintenance and management. just don't add any financing costs.
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Bryan Blankenship
Investor · Cincinnati, OH · Member since 2014 · 538 posts · 432 votes
6y
@Austin Steed The way you mention it isn't how our county works (or any local area down here). There are base rates just for owning a home, but value doubling doesn't double actual tax. As an example, sold a home over 18 months ago to a client for $105K. Tax base rate is still $40K today!
Even if there is an increase at their 3yr review period, it's almost NEVER to the last sales price as those can be artificial in dozens of ways. One huge way is if you buy a package of properties, the sales price will record against the ENTIRE book of properties, e.g., 5 properties at $100K each equals a $500K sale and that will show up on each of the 5 properties. Thus, they do not use that, they use their own internal metrics and methods, a drive by appraisal every 3 yrs which means they don't know interior condition (good or bad), so they grade it based on average comps in the area which include distressed sales, etc.
Just how our local areas work :)
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Michael HaasBusiness Member
Real Estate Agent · Redmond, 🌧️ Seattle Investor-Agent | 🤑 Helped 400+ Clients Invest in Real Estate | 🏘️ Owns 23 WA Rentals & Airbnbs | 🏗️ Built 5 DADU's | 📈 You Can Do It Too · Member since 2016 · 724 posts · 3k+ votes
6y
As crazy as it sounds, 6-7% CAP in the greater puget sound is actually quite good. Seattle averages in the low 5%s and tacoma in the low 6%s or high 5%s.
That's the current CAP of course, so for those properties (or any property) most investors would be looking to add value and increase returns after purchasing.
[email protected]408-439-7873
HouseHack Seattle | Michael Haas & Team572 Reviews
Website View Page
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John Barrett
Rental Property Investor · Everett, WA · Member since 2015 · 458 posts · 386 votes
6y
@Ric Mittleider the last few properties that we have purchase have been sold with a cap rate around 6%. This obviously changes with the level of demand in the market here in the greater Seattle area. The strong demand combined with very low interest rates have allowed sellers to compress cap rates greatly over the last few years. As @Michael Haas stated most multifamily properties in Seattle are selling with sub 5% cap rates. While cap rates (like comps) are interesting, I generally do not use them as go / no go for making a purchase decisions.
The determining factor is what options the property presents in relation to your particular investing strategy that will allow for forced appreciation and increased NOI.
Best of luck,
John

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Mary M.
Rental Property Investor · Portland OR · Member since 2018 · 2k+ posts · 3k+ votes
6y
Sheesh here in PDX we are seeing 3-6 CAPS based on type of property .... and in the bay area it is 3-4 , 5 if you are reeeeeally lucky
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Timothy Hero
Lender · United States · Member since 2020 · 1k+ posts · 499 votes
6y
I wouldn't be interested in a deal if I can't get at least 25% ROI. If I put down $40k as a down payment, I want to net at least $10k/yr + appreciation of at least 3.5%.

These aren't every day opportunities, but if you're in the right market, it's very feasible. I know people getting 40% ROI.
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Jai Reddy
Edmond, OK · Member since 2012 · 456 posts · 270 votes
6y
@Timothy Hero
Just to clarify, Cap Rate and ROI are different metrics (unless there is no debt payment). So its typical for financed properties to have a higher ROI and a lower Cap Rate.
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Timothy Hero
Lender · United States · Member since 2020 · 1k+ posts · 499 votes
6y
Originally posted by @Jai Reddy:
@Timothy Hero
Just to clarify, Cap Rate and ROI are different metrics (unless there is no debt payment). So its typical for financed properties to have a higher ROI and a lower Cap Rate.

Correct. I overlooked the comment.

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Danny Webber
Real Estate Broker · Austin, TX · Member since 2016 · 834 posts · 449 votes
6y
Cap rate is only 1 metric. Look at everything: vacancy % expected, maintenance, pm fees, appreciation, property tax/ins projected increases, etc...
Cap rate could mean very little when you look at total picture.
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Edward Seid
Real Estate Agent · Seattle, WA · Member since 2014 · 87 posts · 39 votes
6y
Stabilized multifamily and commercial in Seattle is ~3.5-4%. With low interest rates, the cap rate compression is greater than normal I'd say. Sometimes I wish interest rates were much higher so at least I know 10 years later there's room to refi to a lower rate.
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Ronan DonnellyPro Member
Investor · New York City, NY · Member since 2012 · 332 posts · 385 votes
6y
@Ric Mittleider, from my perspective it can be dangerous to focus on an absolute return number. Higher returns are not necessarily better than lower returns, it's all about how much risk you are taking in order to get the return. Good luck!
[email protected]
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Ryan MahoneyPro Member
Rental Property Investor · Hastings, NE · Member since 2018 · 57 posts · 53 votes
6y
@Austin Steed I run my numbers based on current property tax rates. I forecast future tax valuation increases higher than standard as there is usually a small increase in rates. I am doing 300% value add but I do see what you are saying if you were to do that on a project.
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Louie Masters
Rental Property Investor · Fremont, NE · Member since 2016 · 23 posts · 5 votes
6y
@Ric Mittleider that’s really low. I’m a strong believer in always bidding low regardless of list price. Some people get offended by low offers and I don’t understand that. It’s just business. With that said I would not do any deal with less than 10% cap.
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Louie Masters
Rental Property Investor · Fremont, NE · Member since 2016 · 23 posts · 5 votes
6y
@Ryan Mahoney hey Ryan Hastings huh? Any 3b2b near the college for under 100k?
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Ryan MahoneyPro Member
Rental Property Investor · Hastings, NE · Member since 2018 · 57 posts · 53 votes
6y
@Louie Masters - I just got a 2/1 with 2 more non conforming in the basement for 83k right next to the college. Will add egress windows and put a 2nd bathroom in the basement. There are some that meet your criteria that pop up but most need at least some medium level of renovation.
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Ric Mittleider
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Rental Property Investor · Everett, WA · Member since 2019 · 24 posts · 8 votes
6y
@Ryan Mahoney you can't compare what you earn in Nebraska to what you earn in Seattle. In NE you wouldn't make 100K in appreciation over a year or 2. that is a major factor. Its hard to compare different markets in that way.
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Ryan MahoneyPro Member
Rental Property Investor · Hastings, NE · Member since 2018 · 57 posts · 53 votes
6y
@Ric Mittleider - I 100% agree. Sorry if i gave the impression I was comparing markets. It looks like your original post was about the Seattle market and I saw you mentioned you invested in Nebraska - so my mistake on giving information on the Nebraska market.
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