Good buy? 10% cap rate, 8.5% coc, $35 cash flow?

8 Replies

Is this a good buy? Ok neighborhood, not bad but not good. 80k for house. Place is a duplex, 1 bed 1 bath on each side. 1500 sqft. Rent is currently 450 on each unit so 900 total. Thoughts?

@Mike Williams  

Seems slim from my perspective. Also units of that size will only attract an investor buyer (except in New York or San Francisco), so your chances of unloading it for a good profit are slim.

It seems like it's doing slightly more than 1%, but if it's a high tax area or insurance is killing, then I would walk on it.

good deal at 60k.

I would be holding the property as a rental. Reason the cash flow is so low is I will only be putting 3.5% down and live in one unit and rent out the other so my mortgage will be about 560 a month. 10% cap rate seems good even though the cash flow will start low. 

@Mike Williams - Your CAP rate shouldn't be higher than your COC returns if you're leveraged in this lending environment. Generally speaking, COC = CAP when you buy with all cash. If Interest Rate > CAP then COC CAP.

By that logic, unless you're paying really high interest, your COC should be higher than 8.5 or your CAP should be less than 10...care to share how you're calculating these?

Originally posted by @Michael Siekerka:

@Mike Williams - Your CAP rate shouldn't be higher than your COC returns if you're leveraged in this lending environment. Generally speaking, COC = CAP when you buy with all cash. If Interest Rate > CAP then COC CAP.

By that logic, unless you're paying really high interest, your COC should be higher than 8.5 or your CAP should be less than 10...care to share how you're calculating these?

After a little analysis, those formulas are not quite correct - if your interest rate is equal to CAP rate your COC return can still be less than CAP rate. But if you want a general idea, the stuff above is close enough.

Originally posted by @Michael Seeker :

@Mike Williams - Your CAP rate shouldn't be higher than your COC returns if you're leveraged in this lending environment. Generally speaking, COC = CAP when you buy with all cash. If Interest Rate > CAP then COC CAP.

By that logic, unless you're paying really high interest, your COC should be higher than 8.5 or your CAP should be less than 10...care to share how you're calculating these?

Not necessarily. That would be true if the loan payments were interest only, but generally there is also principle being paid. So depending on the loan terms the COC could be less than the Cap rate even if the interest rate is low. That said, if we're looking at a long term loan, like 30 years, then you're probably going to be right about COC > CAP.

Back to the main topic, I would consider $35 to be within the margin of error for estimating cashflow, making COC an unreliable measure since it would only take $35 of error in estimating rent, repairs, vacancy, or anything else for it to be break even.

Michael, great call! I calculated my mortgage payment too high. Looking at it now cashflow would be 220 a month :) Cap rate staying the same but cash on cash return being 43%? Would that be right? Income being 2640 annually / (2700 down + 3500 closing costs)

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