Rookie crunching data for possible 1st buy

Knoxville, TN · Member since 2014 · 8 posts · 6 votes

Hey all. My wife and I are considering making an offer on the following SFH:

3/1 with 1340sq.ft listed at $64,900. Built in 1954. Its an estate sale by the only child of the deceased homeowner. Vacant for over a year; on and off the market since June of 2013. Decent neighborhood. Lots of seniors, blue collar folks and some college kids.

$4500 in DIY renovations estimated: drywall repairs for small mold & water spots; painting interior; ripping up carpet & installing hardwood laminate; ripping up vinyl & installing tile; replacing oven/stove, refrigerator, & dishwasher. Can live with roof and HVAC but will probably need attention w/in 5yrs. We plan on living in it the first year and then renting it out.

20% down for 30yr fixed at 4.3%

Estimate $850/mo. in rent. Median rent in area estimated at $750/mo. Upper end is around $1000/mo.

Estimated cap rate: 7%

Estimated annual cash flow with 10% PM factored in: $3263

What do the BPers think? Thanks!

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Rick H.

Lender · Greater LA/Orange County area, CA · Member since 2012 · 3k+ posts · 3k+ votes

12y

I'm only guessing that Bob Bowling has thrown his hands up in the air by now.

I believe his point about CAP rates is that they are market-driven metrics and are not well-suited for SFR's. Relates more to what investors are willing to pay for a particular product type at a given time in a certain market.

Institutional investors rely heavily on the accuracy of the accounting and strength of management of a project and it makes sense where capital and ongoing expenses are spread over larger number of tenants. They want standardized information in order to compare investments. Much harder to do that with an SFR.

What hasn't been addressed is the intrinsic value that others place in SFR's that not typically found in real estate products built for and intended to to be investments (multi-unit res., commercial, industrial, etc.).

ROI is a good fit for measuring performance on 1-4 units. GRM (gross rent multiplier), maybe. However, I'm not going to use some seller's pro-forma CAP rate to decide if I'm going to buy a particular SFR.

Bottom-line investors don't have much tolerance for fluff. I think ROI fits the bill best for 1-4 units.

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Account Closed
Investor · Honolulu, HI · Member since 2013 · 3k+ posts · 1k+ votes
12y
Originally posted by @Matt McLeod:
Ali, thanks for commenting.
Bob, I get that you do not support using cap rate to evaluate properties. I'd appreciate it if in the future you wouldn't comment on my posts. Your comments have been rude, condescending and ridiculously confrontational. Congratulations on your success. Please go away and enjoy it.

Thanks everyone else who took the time to comment. See y'all around.

" Your comments have been rude, condescending and ridiculously confrontational." AND CORRECT Hey I'll take that. If you choose to remain ignorant then don't ask anyone that knows what he's/she's talking about. I like how some of you want to NOT listen to me but also ignore @Ben Leybovich & Frank Gallinelli. You notice how no one is stepping up to prove themselves correct or even me wrong. I've seen plenty of people like you that ONLY want to hear what they want to hear. Plenty of people will capitalize on that to help themselves to your money. Real estate investing is not for sissies. If my factual comments hurt your feelings I think that and your ignorance will spell doom for you. I'd wish you luck but I don't think that will be enough. If you don't want to get professional advice and information then why are you here?
1 Reply
Ben Leybovich
Rental Property Investor · Phoenix/Lima, Arizona/OH · Member since 2012 · 4k+ posts · 4k+ votes
12y
@Matt McLeod

Welcome to BP Nation. Sorry about your thread going a bit sideways Matt - I think we have a bit of a personality clash here :) I'll do my best to sort that out, but first thing is first:

This sounds like a $25-35k house to me depending on rehab, but you know how to do the numbers :)

Now, as to the CAP Rate conversation. No one is wrong here guys - this is a matter of maturity. @Ali Boone - the article in question was indeed one of yours, and Frank and I did comment on it. Your understanding of what CAP Rate is and how it's used is correct, but narrow-scoped. Think of CAP Rate as an iceberg with most of its' mass under surface. Your explanations are right on but the focus is only on that which you can see above water - there is much more to CAPs and it takes perspective which come with experience to see the rest. Just remember Ali - CAPs are not about buildings, but about the psychological behavior of the marketplace!

@Account Closed - be nice :) I can tell that you have perspective which comes with years of playing the game - most folks here are young in both age and point of view. Ali is a very talented person. We've butted heads but this doesn't change that she has something special. She will get there. I am with you Bob, but be nice - you remember what it was like before you knew which questions to even ask :)

Thanks guys!

Ben
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Account Closed
Investor · Honolulu, HI · Member since 2013 · 3k+ posts · 1k+ votes
12y
BEN for Secretary of State! You won't mind working for a woman? ;-)
0 Reply
Ben Leybovich
Rental Property Investor · Phoenix/Lima, Arizona/OH · Member since 2012 · 4k+ posts · 4k+ votes
12y
LOL - don't take me there Bob hahaha
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Jean BolgerPro Member
Aurora, CO · Member since 2012 · 2k+ posts · 1k+ votes
12y
Oh for pete's sake guys. This is an unusually (and needlessly) testy exchange for BP.

I get that some of you want reserve the term 'cap rate' for commercial properties, and yes that may be technically correct. And as far as pricing, it doesn't apply to smaller residential properties. Point taken. You get an 'A', so pat yourself on the back.

But fundamentally, a cap rate is simply a formula that figures the price/income ratio of a property. It's a simple metric that one can use to compare investment options. It might help (and it certainly won't hurt) to use this calculation, so why not? Or should we make up a completely new name for the same mathematical formula just to keep folks from getting their knickers in a twist?

And Ben, you're getting more than a little flowery in your thinking there. What DRIVES a cap rate may be all about the psychological behavior of the marketplace, but at the end of the day cap rate is still just a mathematical equation.

I wasn't even going to post again on this thread, but I kind of feel a need to send a quick apology to the original poster and reassure him that most of the time the folks on BP do a better job of keeping themselves in check and do not come off as being arrogant, belligerent and condescending.
1 Reply
Account Closed
Investor · Honolulu, HI · Member since 2013 · 3k+ posts · 1k+ votes
12y
Originally posted by @Jean Bolger:

I get that some of you want reserve the term 'cap rate' for commercial properties, and yes that may be technically correct. And as far as pricing, it doesn't apply to smaller residential properties. Point taken. You get an 'A', so pat yourself on the back.

But fundamentally, a cap rate is simply a formula that figures the price/income ratio of a property. It's a simple metric that one can use to compare investment options. It might help (and it certainly won't hurt) to use this calculation, so why not?

OK, please explain HOW you utilize a cap rate for SFR's.
0 Reply
Rick H.
Lender · Greater LA/Orange County area, CA · Member since 2012 · 3k+ posts · 3k+ votes
12y
I'm only guessing that Bob Bowling has thrown his hands up in the air by now.

I believe his point about CAP rates is that they are market-driven metrics and are not well-suited for SFR's. Relates more to what investors are willing to pay for a particular product type at a given time in a certain market.

Institutional investors rely heavily on the accuracy of the accounting and strength of management of a project and it makes sense where capital and ongoing expenses are spread over larger number of tenants. They want standardized information in order to compare investments. Much harder to do that with an SFR.

What hasn't been addressed is the intrinsic value that others place in SFR's that not typically found in real estate products built for and intended to to be investments (multi-unit res., commercial, industrial, etc.).

ROI is a good fit for measuring performance on 1-4 units. GRM (gross rent multiplier), maybe. However, I'm not going to use some seller's pro-forma CAP rate to decide if I'm going to buy a particular SFR.

Bottom-line investors don't have much tolerance for fluff. I think ROI fits the bill best for 1-4 units.
4 Reply
Jean BolgerPro Member
Aurora, CO · Member since 2012 · 2k+ posts · 1k+ votes
12y
Originally posted by @Bob Bowling:

Originally posted by @Jean Bolger:

I get that some of you want reserve the term 'cap rate' for commercial properties, and yes that may be technically correct. And as far as pricing, it doesn't apply to smaller residential properties. Point taken. You get an 'A', so pat yourself on the back.
But fundamentally, a cap rate is simply a formula that figures the price/income ratio of a property. It's a simple metric that one can use to compare investment options. It might help (and it certainly won't hurt) to use this calculation, so why not?

OK, please explain HOW you utilize a cap rate for SFR's.

I don't invest in SFRs myself, so technically the answer to your question is "I don't."

However, it could be useful to use it to compare any two (or more) other investment options by figuring the price/NOI ratio. While ultimately what's going to be more important is the ROI, this figure (can I just call it a cap rate for now, please?) lets you compare the options before factoring financing costs. Please note that I'm not talking about comparing these properties to some larger market-wide criteria, only to the ones under consideration at the time.

I'll reiterate once more my statement that a cap rate is just a mathematical formula and if it helps you to use it, why not?

But somehow I fear that this thread will never end if I finish with that ;)

1 Reply
Account Closed
Investor · Honolulu, HI · Member since 2013 · 3k+ posts · 1k+ votes
12y
Originally posted by @Jean Bolger:

Originally posted by @Bob Bowling:

Originally posted by @Jean Bolger:

I get that some of you want reserve the term 'cap rate' for commercial properties, and yes that may be technically correct. And as far as pricing, it doesn't apply to smaller residential properties. Point taken. You get an 'A', so pat yourself on the back.
But fundamentally, a cap rate is simply a formula that figures the price/income ratio of a property. It's a simple metric that one can use to compare investment options. It might help (and it certainly won't hurt) to use this calculation, so why not?

OK, please explain HOW you utilize a cap rate for SFR's.

I don't invest in SFRs myself, so technically the answer to your question is "I don't."

However, it could be useful to use it to compare any two (or more) other investment options by figuring the price/NOI ratio. While ultimately what's going to be more important is the ROI, this figure (can I just call it a cap rate for now, please?) lets you compare the options before factoring financing costs. Please note that I'm not talking about comparing these properties to some larger market-wide criteria, only to the ones under consideration at the time.

I'll reiterate once more my statement that a cap rate is just a mathematical formula and if it helps you to use it, why not?

But somehow I fear that this thread will never end if I finish with that ;)

I've never argued that you could not compute a cap rate on a SFR. I have strongly objected to defining NOI as 50% of gross rents. My argument is that once you have it what do you do with it? No one has yet to show how a cap rate on a SFR can be appropriately used. First, what are you using as the purchase price? There IS no cap rate until you make the purchase. If you don't want it at a 7% cap then adjust your offer. If they don't take your offer then you know that this property can't be bought at your 9, 10 or whatever hoped for cap rate you have in mind. Let's say you "run the numbers" and you compute a 12% cap rate and make your offer based on YOUR cap rate and they accept. YEA! YOU have just created a 12% cap on this property! Unfortunately if you did the same figgering on other comparable sales you would find out that they were bought at 15% caps and now you are looking like the worst investor ever.

I also reviewed my posts in this thread and do not see where I was rude, condescending, or confrontational. I was persistent when I felt @Ali Boone

was being evasive and even said the post I was referring to may be from someone else named Ali Boone. The OP said he computed a cap rate based on an example by J Scott that was done on a multi family. He didn't know why it was inappropriate to use it and further asked me to explain. I did respond to the ignorance and the name calling. Perhaps you'd quote my comments that you find off putting.
1 Reply
Jean BolgerPro Member
Aurora, CO · Member since 2012 · 2k+ posts · 1k+ votes
12y
Hey Bob I'm not trying to hassle you, and I doubt anyone else is either. Emotional tone is notoriously difficult to convey in writing, which is something we all need to remember. A person reading a forum post could easily feel that something "sounds" snarky and dismissive, while that could have been far from the intention of the writer. And one person's "persistent" is another person's... (fill in the blank)

Oh, by the way.... I was actually accusing Ben of being condescending, not you. I was trying to be a wee bit subtle about it, but now you've 'outed' me... oh well
0 Reply
Ben Leybovich
Rental Property Investor · Phoenix/Lima, Arizona/OH · Member since 2012 · 4k+ posts · 4k+ votes
12y
Hey there @Jean Bolger - condescending? How and why? I really do believe that Ali is a talented person, which is why I stated that much. I further believe that CAPs are rather useless in most circumstances outside of being a market-driven psychological metric. I think that buying off of a CAP is nuts, even in the multi space - sophisticated investors just don't do that...

Now - we all know that CAP is just a formula. If anyone enjoys doing the math for the sake of doing math, then I defer to your prerogative. However, I prefer to do math when there is a viable application - there is no viable application of the capitalization rate formula to the SFR space. This is the point, is it not Jean...?
2 Reply
Account Closed
Investor · Honolulu, HI · Member since 2013 · 3k+ posts · 1k+ votes
12y
Originally posted by @Jean Bolger:
Hey Bob I'm not trying to hassle you, and I doubt anyone else is either. Emotional tone is notoriously difficult to convey in writing, which is something we all need to remember. A person reading a forum post could easily feel that something "sounds" snarky and dismissive, while that could have been far from the intention of the writer. And one person's "persistent" is another person's... (fill in the blank)
Oh, by the way.... I was actually accusing Ben of being condescending, not you. I was trying to be a wee bit subtle about it, but now you've 'outed' me... oh well

Oh Jean no worries. I don't mind a back and forth exchange. I forget that people don't see my impish grin when I post. I was a model. I do take issue with the posters that come in and make some accusations and then disappear. Especially when they get their facts wrong. Seriously, I posted a fact about traveling FROM Honolulu to Oakland. He had to change the direction to accuse me of being a braggart.

Ben, well I don't think he's been the same since that rat movie and then MJ going BAD. But from my little knowledge of him I think he ACTUALLY does ride a high horse so I'll be the last person to ask him to get off it. ;-)
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Jean BolgerPro Member
Aurora, CO · Member since 2012 · 2k+ posts · 1k+ votes
12y
Sorry Ben! It's just that issue of "tone" that I was talking about. You wrote: "most folks here are young in both age and point of view. Ali is a very talented person. We've butted heads but this doesn't change that she has something special. She will get there." And to me, frankly, that sounds condescending, as if she's some talented child that you're indulging. It probably wasn't how you intended me to hear it, but there it is...

This is why writing -- especially the type of conversational writing that happens on a forum -- is tricky.
0 Reply
Account Closed
Investor · Singapore · Member since 2013 · 1k+ posts · 3k+ votes
12y
Dont bother arguing with @Account Closed . I have explained in great detail in earlier threads how cap rate is a viable means of comparing different investments. For Bob this is bordering on a religious conviction that cap rates should be used only in the way he deems appropriate and us lessor mortals have no right to even spell the words on the forum. He keeps challenging people on how to use Cap rate for SFR. The answer: Same way as you do for commercial. I accept that you cannot value SFRs solely on the basis of cap rates. But given a price of a SFR you can certainly use that to calculate your expected cap rate. And then if you know what cap rate you want, you can search for properties that meet your requirement.
0 Reply
J ScottPro Member
Moderator
Investor · Sarasota, FL · Member since 2008 · 17k+ posts · 17k+ votes
12y

Bob -

Cap rate is a mathematical tool for modeling the return on a cash flowing asset. As far as I can tell, the math doesn't discriminate based on what that underlying asset is. Why should it matter if the underlying asset is a multi-family property, a single family property or a steaming pile of poop (if you can find one of those that cash flows)?

While I love Ben to death, I completely disagree with his assertion that cap rate is only valuable when analyzing multi-family deals (and I'm not sure that comment of his was cut-and-paste in an appropriate context). As an example, I've used cap rate to help analyze billion dollar business acquisitions; yesterday, I used cap rate to analyze a potential self storage deal; etc. I'm quite certain it's not just used for multi-family analysis.

Ben also asserted that in the single family world, comp analysis is used to value property. That's certainly true a majority of the time, but absolutely is not always the case. When I purchase single family rental properties, I don't give a crap about the market value (as determine by a CMA). If I can generate a 30% IRR on a single family rental, I'm happy to pay above market value...hell, I'll pay WAY above market value if the returns justify it. In many cases, I won't even do a CMA, other than to determine what my owner occupant competitors may be able to pay for the property. Market value is meaningless when the bulk of the return will come from cash flow and when the resale of the asset will be to another investor who will be holding for cash flow.

I have a feeling Ben will agree with both of these statements above (correct me if I'm wrong, Ben)...

So, Bob, if you're going to argue that cap rate isn't a good measure of return for one particular type of cash flowing asset (in this case, single family rentals), you're going to have to justify it better than just cutting and pasting someone else's ideas.

Please tell us why you (not others) think cap rate is suitable for analyzing/comparing the return of all other cash flowing assets, but automatically breaks down for single family cash flowing assets (or if you think it breaks down for other types of cash flowing assets, please tell what other ones it's not appropriate for).

To say that a mathematical model breaks down based on the physical configuration of the underlying asset (one unit versus many units) doesn't ring true for me. Maybe you're right, but I certainly haven't seen a logical argument here to support that view.

Please -- in your own words -- explain it to me and convince me.
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Mike McKinzie
Investor · Westminster, CO · Member since 2009 · 1k+ posts · 1k+ votes
12y
Personally, I would offer $30,000 for the house. The only time "Capitalization Rate" does NOT matter is when a person is going to LIVE in the home as there is no income being produced to figure out a cap rate. While I use the 1% rule on most of my purchases, there are numerous other factors that need to be considered. The items on this deal that concern me are age, number of baths, near future LARGE expenses and location. I would bet that there is at least $20,000 worth of "upgrades/repairs" needed in the next 3-5 years here.
2 Reply
Account Closed
Investor · Singapore · Member since 2013 · 1k+ posts · 3k+ votes
12y
@J Scott Very well put. Thats exactly what I have been trying to say. Cap rate is a formula you can use on different assets. Its simply NOI/Purchase price. Nothing more. How NOI is calculated is up to you. It helps me decide where to allocate my capital. Its not the only metric I use. Risk is the flip side of Cap rates. High cap rates are high for a reason. Banks only pay 1% because there is zero principle or interest risk and full liquidity. A T bill held to maturity pays 2% for 10 years with no risk to P+I but less liquidity. Then there are assets which can appreciate as well like stocks and real estate. You can accept lower Cap rates but higher potential capital gain. Or go for high current income. It all depends on what you want. It doesnt negate the basic math.
1 Reply
Account Closed
Investor · Honolulu, HI · Member since 2013 · 3k+ posts · 1k+ votes
12y
Originally posted by @J Scott:

Bob -

Cap rate is a mathematical tool for modeling the return on a cash flowing asset. As far as I can tell, the math doesn't discriminate based on what that underlying asset is. Why should it matter if the underlying asset is a multi-family property, a single family property or a steaming pile of poop (if you can find one of those that cash flows)?

While I love Ben to death, I completely disagree with his assertion that cap rate is only valuable when analyzing multi-family deals (and I'm not sure that comment of his was cut-and-paste in an appropriate context). As an example, I've used cap rate to help analyze billion dollar business acquisitions; yesterday, I used cap rate to analyze a potential self storage deal; etc. I'm quite certain it's not just used for multi-family analysis.

Ben also asserted that in the single family world, comp analysis is used to value property. That's certainly true a majority of the time, but absolutely is not always the case. When I purchase single family rental properties, I don't give a crap about the market value (as determine by a CMA). If I can generate a 30% IRR on a single family rental, I'm happy to pay above market value...hell, I'll pay WAY above market value if the returns justify it. In many cases, I won't even do a CMA, other than to determine what my owner occupant competitors may be able to pay for the property. Market value is meaningless when the bulk of the return will come from cash flow and when the resale of the asset will be to another investor who will be holding for cash flow.

I have a feeling Ben will agree with both of these statements above (correct me if I'm wrong, Ben)...

So, Bob, if you're going to argue that cap rate isn't a good measure of return for one particular type of cash flowing asset (in this case, single family rentals), you're going to have to justify it better than just cutting and pasting someone else's ideas.

Please tell us why you (not others) think cap rate is suitable for analyzing/comparing the return of all other cash flowing assets, but automatically breaks down for single family cash flowing assets (or if you think it breaks down for other types of cash flowing assets, please tell what other ones it's not appropriate for).

To say that a mathematical model breaks down based on the physical configuration of the underlying asset (one unit versus many units) doesn't ring true for me. Maybe you're right, but I certainly haven't seen a logical argument here to support that view.

Please -- in your own words -- explain it to me and convince me.

Here ya go. Please respond to this ...I've never argued that you could not compute a cap rate on a SFR. I have strongly objected to defining NOI as 50% of gross rents. My argument is that once you have it what do you do with it? No one has yet to show how a cap rate on a SFR can be appropriately used. First, what are you using as the purchase price? There IS no cap rate until you make the purchase. If you don't want it at a 7% cap then adjust your offer. If they don't take your offer then you know that this property can't be bought at your 9, 10 or whatever hoped for cap rate you have in mind. Let's say you "run the numbers" and you compute a 12% cap rate and make your offer based on YOUR cap rate and they accept. YEA! YOU have just created a 12% cap on this property! Unfortunately if you did the same figgering on other comparable sales you would find out that they were bought at 15% caps and now you are looking like the worst investor ever.
0 Reply
Ben Leybovich
Rental Property Investor · Phoenix/Lima, Arizona/OH · Member since 2012 · 4k+ posts · 4k+ votes
12y
@J Scott

I love you too, though I feel weird saying so cause I already have a girlfriend - ever heard of @Brandon Turner ?

Jason - I agree with you in principal. We can evaluate anything that moves with CAP, but should we...?

CAP Rate, in my opinion, should not be used to determine the purchase price of any asset, be it SFR, Multi, commericial, or industreal. It should only be used to determine the market value - those are not one and the same :)
1 Reply
Account Closed
Investor · Honolulu, HI · Member since 2013 · 3k+ posts · 1k+ votes
12y
@J Scott

1. I don't believe anyone here that is arguing for utilizing cap rates for SFR's JUST like they do for commercial properties understand how they are used for commercial properties or why. Investors pick a market they want to be in for various reasons. They then look at what cap rate the market is buying at. They don't start with a target cap rate. Commercial investors DO NOT buy cap rates.

2. NOI is computable for SFR;s and commercial properties. I would NEVER argue against anyone doing that computation for any property type. The NOI as

@Ben Leybovich pointed out is the 90% of the iceberg. That is what a professional commercial investor is going to look at. Now if that investor doesn't KNOW what the market cap rate is how can he utilize a cap rate? He checks with publications like Korpacz that analyzes ACTUAL sales and looks at their financials, I&E etc. and reports to the market what each buyer was buying. They report the income stream and summarize it into a cap rate. Without the detailed analysis the CAP RATE means NOTHING. Now where do you get this detailed analysis for SFR's? Do you just make it up like @Account Closed

by coming up with his made up definition of "NOI = 50% of gross rents? I challenged him to show any professional organization that would agree with that definition.

So now the investor KNOWS at what cap rate the market is buying at and if he doesn't want to or can't buy at that rate then he is either OUT of that market and tries to find properties in another market, BUT he's still NOT shopping for cap rates he's shopping for an asset.

Let's try to keep this discussion focused so that others can learn without us making up definitions.
0 Reply
J ScottPro Member
Moderator
Investor · Sarasota, FL · Member since 2008 · 17k+ posts · 17k+ votes
12y
Originally posted by @Bob Bowling:
Here ya go. Please respond to this ...I've never argued that you could not compute a cap rate on a SFR. I have strongly objected to defining NOI as 50% of gross rents. My argument is that once you have it what do you do with it? No one has yet to show how a cap rate on a SFR can be appropriately used. First, what are you using as the purchase price? There IS no cap rate until you make the purchase. If you don't want it at a 7% cap then adjust your offer. If they don't take your offer then you know that this property can't be bought at your 9, 10 or whatever hoped for cap rate you have in mind. Let's say you "run the numbers" and you compute a 12% cap rate and make your offer based on YOUR cap rate and they accept. YEA! YOU have just created a 12% cap on this property! Unfortunately if you did the same figgering on other comparable sales you would find out that they were bought at 15% caps and now you are looking like the worst investor ever.

First, I'm not really sure how to address this, as your points above are (at best) a non-sequitur to the discussion we've been having. But, I'll address your points and ask some questions along the way (and I'll even number them so you we can keep on point in future posts):

1. What does "defining NOI as 50% of gross rents" have to do with your assertion about cap rates not applying to single family houses? These two points are completely unrelated. If you have an issue with the 50% rule, that's fine...but you're going to have to explain to me how the 50% rule invalidates the use of cap rates for a single family home. You can use the 50% rule for multi-family properties too...does that make it better/different? Please tell me what the 50% rule has to do with cap rates not being applicable to single family houses.

2. To your point that "nobody has shown you how a cap rate on a SFR can be appropriately used." Here's how I use it. I buy most of my single family rentals all-cash. Given that, my cap rate is equivalent to my ROI. Once I determine my desired cap rate, I can use that cap rate along with my estimated NOI to determine my maximum purchase price for the property in order to achieve my desired ROI. So, I use cap rate to determine how much I can pay for my property -- how is that not an appropriate use?

3. Going back to the point that "nobody has shown you how a cap rate on a SFR can be appropriately used." This clearly means you know how cap rate can be appropriately used on other types of non-SFR assets. Can you please explain how cap rate is appropriately used on other types of assets? And then tell me why single family investments don't qualify under the exact same definition.

4. One more time, going back to the point that "nobody has shown you how a cap rate on a SFR can be appropriately used." The very definition/concept of cap rate supports the fact that cap rate is just as applicable to single family houses as it is to any other type of cash flowing asset. Let's try an ad-hoc logical proof: A. Cap rate is a mathematical tool for analyzing returns on a cash flowing asset. Do you agree with that point, yes or no? B. Single family rentals are cash flowing assets. Do you agree with that point, yes or not? If you agree with both those points, than by transitivity, cap rate is a tool for analyzing the returns on a single family property. Do you agree with A? Do you agree with B? Do you believe in the transitive property? Assuming so, then by definition, cap rate is applicable to single family houses in the same exact way it's applicable to every other type of cash flowing asset. Where does my logic on how cap rate applying to single family investment properties break down?

5. You then go on about how there is no cap rate until after a purchase, and a bunch of other stuff that is just rambling and really doesn't make much sense to me. But, everything you say seems just as applicable to any asset type, not just single family houses. In other words, you argue that cap rate isn't important, but you don't specify how this is any different for single family houses than for other asset types. So, how exactly is cap rate used for other asset types in a way that is meaningful, and how does this not apply to single family investments? (this is the same question I had in #3, so if you answered that one, you can ignore this one)

I think if you can answer these specific questions, we can make some progress here and perhaps even come to an agreement...
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1 Reply
Account Closed
Investor · Honolulu, HI · Member since 2013 · 3k+ posts · 1k+ votes
12y
Originally posted by @J Scott:

So, Bob, if you're going to argue that cap rate isn't a good measure of return for one particular type of cash flowing asset (in this case, single family rentals), you're going to have to justify it better than just cutting and pasting someone else's ideas.

See, here's the main problem with this discussion. I NEVER SAID A CAP RATE WAS A GOOD MEASURE OF RETURN FOR ONE PARTICULAR TYPE OF CASH FLOWING ASSET. It is used to "comp" what the market is doing to obtain a particular income stream. Obviously if someone bought at a 5 cap AND THERE IS NO 5 CAP until the purchase is made then they think they will make a profit, right or wrong. Obviously no one thought the deal should be at a 4.9 cap or if they did they did not have the resources to make it happen. I'm sure they would have rather obtained the same property at a 6 cap but THE MARKET SAID "NO" So if you are shopping 6 caps, why would you, then you are not in this market and may have passed on a very profitable venture because you couldn't see the profit for the ~~trees cap~~ rate.
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Account Closed
Investor · Honolulu, HI · Member since 2013 · 3k+ posts · 1k+ votes
12y
1. What does "defining NOI as 50% of gross rents" have to do with your assertion about cap rates not applying to single family houses? These two points are completely unrelated. If you have an issue with the 50% rule, that's fine...but you're going to have to explain to me how the 50% rule invalidates the use of cap rates for a single family home. You can use the 50% rule for multi-family properties too...does that make it better/different? Please tell me what the 50% rule has to do with cap rates not being applicable to single family houses.

Ask @Account Closed

I think we're cross posting and I am responding to both you and Anish. He is the one asserting that you can use the 50% rule to compute a cap rate. That is NOT appropriate for any property type. As I stated the cap rate is NOTHING without being able to analyze how the NOI was calculated on the cap rate comps. Can you agree with this and we can move on with the discussion between you and I without these distractions?
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J ScottPro Member
Moderator
Investor · Sarasota, FL · Member since 2008 · 17k+ posts · 17k+ votes
12y
Originally posted by @Ben Leybovich:

CAP Rate, in my opinion, should not be used to determine the purchase price of any asset, be it SFR, Multi, commericial, or industreal. It should only be used to determine the market value - those are not one and the same :)

What if you're making an all cash purchase and you have a target ROI...why wouldn't you use cap rate to determine the purchase price in that situation? :-)
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Ben Leybovich
Rental Property Investor · Phoenix/Lima, Arizona/OH · Member since 2012 · 4k+ posts · 4k+ votes
12y
@J Scott

I would- to price the exit, which in turn defines my limits. From here I discount the future value. It's all about the exit Jason. I know that we buy CF to hold, but it's still all about the exit :) This is how we stay safe - we price future value and then we discount it. As such, CAP is a metric which describes market psychology upon which to base the exit valuation. In SFR that's meaningless because exit value is a function of CMA. Makes sense?
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