Originally posted by @Roy Cleeves :
@Chris Baxter - can you tell me what Cap rate of return you are getting on the 6 plex in Moncton? Thanks.
I bet I could not tell you the CAP on a 6-plex in Moncton (or Fredericton, or Saint John) and it is one our markets. I never underwrite using the CAP rate ... in fact, the only time I have any curiosity about the CAP rate is when I am thinking about selling a property (and am trying to determine how much someone will pay).
CAP rate is a dangerously misused metric which is far to frequently batted about as though it has significance beyond being the inverse of a P/E ratio for a business/property at a point in time.
Thanks for that @Roy N. People often look at me funny when I can't spout the cap rates for properties I own. Realtors often ask "what kind of cap rate are you looking for?" and again, I get blank stares when I reply that cap rate isn't important.
In listings, agents present the best possible cap rate to attract buyers. If you look at the financials, you'll see that many expenses / income adjustments that should be included in the NOI calculations are omitted: vacancy, property management, maintenance, snow removal, anything done by the current owner, etc.
My advice...ignore cap rates and do your own financial analysis of any deal
@Chris Baxter - I'm on the East Coast (nova scotia) and have certainly found some great properties - from a cash flow perspective - outside of Halifax as well! As someone said - there's always deals for those who look!
Thanks for this info guys. I have a builder planning to build a 6 plex in Milverton, Ontario which is not a major centre at all. Small town in Southwestern Ontario. And he felt he could get $1.2M based upon 6% cap rate. Yet so much more comes into the equation including the ability to finance it in a smaller centre, and would the rents really be as high as he is predicting, appreciation rate lower in small town etc.
I have recommended that he consider Kitchener or Waterloo or London even instead.
@Roy Cleeves I had a chuckle when I googled Milverton and google comes up with a picture of a Menonite woman. Yeah, small-town. However, I saw a 6-plex in Hensell (a bit west of Milverton) sell at a 6-cap after only a couple days on market. At 1.2 million for a six cap, though, I run the numbers on this proposed build to about 1300+utilities. You will NOT get 1300+ in Milverton unless you are renting luxury 3-bedroom units with granite... even then I doubt it.
Then again, are you finding legitimate cash-flow at all in Kitchener or Waterloo? Even INSIDE london you'd better be prepared to rehab or convert to get decent cash flow now - that's why i'm trying to be more familiar with the surrounding towns. Generally speaking, if a realtor has touched it, there's no cash flow left.
@ Matt Geerts Thanks so much for this reply - I was working with 1200 as the rental and I agree - we won't get that from the Menonites and they probably won't live in this type of building - LOL.
Although the builder was planning to put in an elevator - can you imagine the cost over runs. LOL. Crazy. I am not interested in that area.
So I told him to look to build in KW area instead.
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