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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J ScottPro Member
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Investor · Sarasota, FL · Member since 2008 · 17k+ posts · 17k+ votes
12y
Originally posted by @Account Closed:
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?

We can talk about that later. I'm starting at the beginning -- the very first sentence of your very first post in this thread to the OP:

"Why would anyone care about a cap rate on a SFR?"

I thought this came off as more than a little obnoxious, but I can easily ignore that if the underlying point being made is a reasonable one...so I'm trying to understand your point...

I noticed that you didn't just say "Why would anyone care about cap rate?" If you had said that, it would imply that you thought cap itself was a flawed tool. But, you specifically asked why anyone would care about cap rate on a SFR.

That implies to me that you believe cap rate is a tool that is perfectly applicable to other types of cash flowing assets, but, for some reason, is not applicable to single family investment properties. That single family investment properties somehow violate the laws of investment analysis.

Can you explain why someone would care about cap rate on other types of assets but not on SFR or why SFR are inherently different from other types of assets when it comes to cap rates?
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Account Closed
Investor · Honolulu, HI · Member since 2013 · 3k+ posts · 1k+ votes
12y
@J Scott

I'm working ahead on number 2 but I need a definition of "desired cap rate". How do you compute this, is it constant? Thanks
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Account Closed
Investor · Honolulu, HI · Member since 2013 · 3k+ posts · 1k+ votes
12y
Originally posted by @J Scott:

Originally posted by @Account Closed:
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?

We can talk about that later. I'm starting at the beginning -- the very first sentence of your very first post in this thread to the OP:

"Why would anyone care about a cap rate on a SFR?"

I thought this came off as more than a little obnoxious, but I can easily ignore that if the underlying point being made is a reasonable one...so I'm trying to understand your point...

I noticed that you didn't just say "Why would anyone care about cap rate?" If you had said that, it would imply that you thought cap itself was a flawed tool. But, you specifically asked why anyone would care about cap rate on a SFR.

That implies to me that you believe cap rate is a tool that is perfectly applicable to other types of cash flowing assets, but, for some reason, is not applicable to single family investment properties. That single family investment properties somehow violate the laws of investment analysis.

Can you explain why someone would care about cap rate on other types of assets but not on SFR or why SFR are inherently different from other types of assets when it comes to cap rates?

Jesus @J Scott

if you wanted to start with THAT then YOU should have made it #1 !!!!!!!!!!!!!!!!!!!!!!!!!! I've actually have already answered that and will follow up AFTER we go thru the materials as you've numbered them. That is only fair to me and the 2 people that are probably still following this (Hi Mom!). Don't you think that's fair?
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J ScottPro Member
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Investor · Sarasota, FL · Member since 2008 · 17k+ posts · 17k+ votes
12y
Originally posted by @Ben Leybovich:
@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?

It makes sense. But, I disagree with you. :-)

The crux of your entire argument hinges on your statement:

"In SFR that's meaningless because exit value is a function of CMA."

But, I don't think you really believe that.

Let's say I have two SFR properties (both in great condition in great neighborhoods, but perhaps different cities):

1. One is for sale for $50K with market rents at $300/month.

2. One is for sale for $50K with market rents at $1000/month.

Which one would you buy? Does the CMA matter to you?

Would it matter if #1 was worth $55K (you were able to buy under market value) and #2 was worth $45K (you had to pay over market value)? I doubt it -- I have a feeling you'd happily pay over market value for the #2 deal long before you took the #1 deal...am I wrong?

The exit value of a SFR is only a function of a CMA if you're selling it to an owner occupant. When you're selling it as a cash flowing investment (which is the exit strategy for many landlords), the valuation of a SFR is no different than that of a multi-family property, a commercial property, a business or a cash flowing pile of dog poop.

Can you really argue with that?
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J ScottPro Member
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Investor · Sarasota, FL · Member since 2008 · 17k+ posts · 17k+ votes
12y
Originally posted by @Account Closed:
@J Scott

I'm working ahead on number 2 but I need a definition of "desired cap rate". How do you compute this, is it constant? Thanks

Yup, constant. 12% actually.
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Bryan Hancock
Investor · Round Rock, TX · Member since 2010 · 8k+ posts · 4k+ votes
12y
I didn't read the whole thread, but valuing investment property you intend to derive income from based solely on exit comparables is ludicrous. Valuing anything solely on a capitalization rate or any other quick screening unit of measure is almost equally as dumb. This includes the "50% rule" or many of the other highly touted items on BP.

There are online calculators and several spreadsheets on the Resources section of BP. I suggest you learn how to analyze cash flow streams and discount them based on assumptions you make about your WACC. A simple IRR calculation with data based on long-term trends, true economic vacancy, and timing of capex will put you way ahead of most people analyzing investments. There are many "12% cap rate" projects that are HORRIBLE investments because they have incorrect projections for economic vacancy, are run like hotels, etc. Note that many projects have optimal sell years far in advance of where they're sold as well if your goal is to optimize how your money works.

Another thing to consider is that residential Realtors don't want you using cap rates for analyzing properties because the simple analysis would show you how horrible most of the "investments" are. Cap rates on the 4-6% range are quite common for SFRs and thus they'd fail to cover the debt service on the project under normal leverage scenarios; which would yield negative cash flow. Analyzing any cash flow stream without the use of basic finance procedures that are taught in introductory level finance courses is going to yield garbage. Garbage in, garbage out.
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Account Closed
Investor · Honolulu, HI · Member since 2013 · 3k+ posts · 1k+ votes
12y
Originally posted by @J Scott:

Originally posted by @Account Closed:
@J Scott
I'm working ahead on number 2 but I need a definition of "desired cap rate". How do you compute this, is it constant? Thanks

Yup, constant. 12% actually.

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?

Cap rates are set by market sales.
1. All your made up number does is keep you out of certain markets.
2. Or makes you over pay if the market cap rate is higher than 12.
  
  of course you’ll be blissfully ignorant since there is NOT a reliable source of actual market cap rates for SFR’s like there is for commercial properties. See how making up your own little “market” world is not very professional? It’s kinda like someone coming to SF and saying they’re in the market for a $100,000 SFR. They ARE NOT in the market. Or say you’re in Detroit and your goal is a $100,000 three bedroom house. I’m sure you could find plenty of them that are not worth $100,000. Those goals MEAN nothing until they can be compared to market.
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J ScottPro Member
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Investor · Sarasota, FL · Member since 2008 · 17k+ posts · 17k+ votes
12y
Originally posted by @Bob Bowling:
Cap rates are set by market sales.

All your made up number does is keep you out of certain markets.

Or makes you over pay if the market cap rate is higher than 12.

of course you’ll be blissfully ignorant since there is NOT a reliable source of actual market cap rates for SFR’s like there is for commercial properties. See how making up your own little “market” world is not very professional? It’s kinda like someone coming to SF and saying they’re in the market for a $100,000 SFR. They ARE NOT in the market. Or say you’re in Detroit and your goal is a $100,000 three bedroom house. I’m sure you could find plenty of them that are not worth $100,000. Those goals MEAN nothing until they can be compared to market.
Sheesh...you're basically making my argument for me...

Okay, to address your two points:

1. Of course my desired cap rate keeps me out of certain markets. That's the whole point of defining that number...so I can determine which markets I should be in and what markets I should be out of! Though it's not just made up -- that's the return I need to achieve my financial goals. To achieve my goals, I require at least 12% return on my passive investments, so I choose markets where I can achieve that return. And I choose to stay out of markets where I can't achieve that return. Why do you believe that line of thinking is unreasonable? How do you determine which markets you should be in?

2. I purposefully choose markets (real markets, not made up ones) where typical cap rates are in the 10-12% range, and then I focus on acquiring assets at the top of that range. And I completely disagree with you point about there not being a reliable source of market comps for SFRs. SFR are *MUCH* more homogenous than commercial properties, and the number of data points is many times the size. So, I'd trust my SFR market data over your commercial data any day of the week. It's much easier to estimate the NOI on a typical SFR than on a commercial property, and unless you're doing forensic analysis on many commercial properties in a single area, I don't believe you really have any idea what the average market cap is in that area -- the best you can do is rely on seller pro-forma data...and hopefully you don't do that. So, if I'm purposefully choosing markets where the cap rates tend to be lower than what I purchase at, how exactly am I at risk for overpaying?

And you still haven't answered any of my other questions...nor have you answered my original question about why single family investment properties are different than other assets when it comes to cap rate.
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Ben Leybovich
Rental Property Investor · Phoenix/Lima, Arizona/OH · Member since 2012 · 4k+ posts · 4k+ votes
12y
Hahaha @J Scott

I wouldn't buy an SFR - to save my life lol. You of all people should know that. Besides, my buyers don't care what my ROI is - they price their purchase through CMA.

There are many rules Jason, but the one that matters is this: First, don't loose; then worry about winning. Not loosing, also known as safety in a transaction is a function of financing options and exit. Both of those are relative to CMA in the SFR space. The banks and buyers couldn't care less about anything to do with income in the SFR space. As such, I stay by what I've said - CAP Rate is misleading in the SFR space :)
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J ScottPro Member
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Investor · Sarasota, FL · Member since 2008 · 17k+ posts · 17k+ votes
12y
Originally posted by @Ben Leybovich:

Besides, my buyers don't care what my ROI is - they price their purchase through CMA.

So, you're selling only to retail buyers?

Most landlords I know (including myself) sell their buy-and-hold properties to other landlords, and those other landlords care much more about the income potential than about the market value of the house...

Different exit strategies...different valuation methods...
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Account Closed
Investor · Honolulu, HI · Member since 2013 · 3k+ posts · 1k+ votes
12y
Originally posted by @J Scott:
Originally posted by @Bob Bowling:

Cap rates are set by market sales.

All your made up number does is keep you out of certain markets.

Or makes you over pay if the market cap rate is higher than 12.

of course you’ll be blissfully ignorant since there is NOT a reliable source of actual market cap rates for SFR’s like there is for commercial properties. See how making up your own little “market” world is not very professional? It’s kinda like someone coming to SF and saying they’re in the market for a $100,000 SFR. They ARE NOT in the market. Or say you’re in Detroit and your goal is a $100,000 three bedroom house. I’m sure you could find plenty of them that are not worth $100,000. Those goals MEAN nothing until they can be compared to market.

Sheesh...you're basically making my argument for me...

Okay, to address your two points:

1. Of course my desired cap rate keeps me out of certain markets. That's the whole point of defining that number...so I can determine which markets I should be in and what markets I should be out of! Though it's not just made up -- that's the return I need to achieve my financial goals. To achieve my goals, I require at least 12% return on my passive investments, so I choose markets where I can achieve that return. And I choose to stay out of markets where I can't achieve that return. Why do you believe that line of thinking is unreasonable? How do you determine which markets you should be in?

2. I purposefully choose markets where typical cap rates are in the 10-12% range, and then I focus on acquiring assets at the top of that range. And I completely disagree with you point about there not being a reliable source of market comps for SFRs. SFR are *MUCH* more homogenous than commercial properties, and the number of data points is many times the size. So, I'd trust my SFR market data over your commercial data any day of the week. It's much easier to estimate the NOI on a typical SFR than on a commercial property, and unless you're doing forensic analysis on many commercial properties in a single area, I don't believe you really have any idea with the average market cap is in that area -- the best you can do is rely on seller pro-forma data...and hopefully you don't do that. So, if I'm purposefully choosing markets where the cap rates tend to be lower than what I purchase at, how exactly am I at risk for overpaying?

And you still haven't answered any of my other questions...
!. The flaw is that you think a cap rate predicts profitability. It does not. The market recognizes that. All it does is show a ratio of rents to price at ONE point in time. Why would anyone buy a commercial property at a 5 cap when there are plenty of 12 caps? Because the 5 caps are in profitable markets and the 12 caps not so much. In some markets ready willing and able investors will pay $1,000.000 for a $50,000 income stream and in other markets they will only pay $417,000 for the SAME income stream. Seems like the market is saying there is a preference for the 5 cap property. Why do you think they are wrong? I bet you can find "better, ha ha" OK higher cap rates in Dertoit. Why limit yourself to 12%? Probably the exact same reason 5 cap investors are avoiding the 12 caps.

Now lets say you and I both have $500,000 to invest in a SFR. No doubt the numbers going in will show you having a higher cap rate. Now we have to replace the roofs in year 2. How much will I have to pay for my 12 square roof and how much will you have to pay for your 30 squares? Dang, that cap rate sure didn't take that into account like a lot of other things. So the answer is I invest where there is upside to rents and appreciation over my holding period and that results in the profitability I desire.

2. Please identify the reliable sources of NOI and cap rates for SFR's. And "at my Ma's house" is not an acceptable answer. Please post a link where I can find this information for say Surprise AZ or Podunk. It sounds like you are competing with yourself if you are only comparing properties that you are computing "cap rates" on at YOUR possible purchase price.

What other questions are you talking about? I've addressed 1 and 2 and working on 3.
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Account Closed
Investor · Honolulu, HI · Member since 2013 · 3k+ posts · 1k+ votes
12y
OK I'm on CA time and don't have the three hour Honolulu time shift to keep up with you red bull fueled whippersnappers. I'll be back tomorrow same bat time same bat station.
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Corey Patterson
Investor · Litchfield Park, AZ · Member since 2014 · 10 posts · 6 votes
12y
Originally posted by @Matt R.:
Newbie here but average deal. Get it for 49k max all in and it is more reasonable as far as business is concerned. If it's been on the market that long I would be tempted to offer 40k especially with 5 years left on the most expensive maintenance items. A wise bper once said " if you are not embarrassed by your offer you paid too much" and he is right. You make your money when you buy.

Thanks,

Matt

Couldn't have said it better myself. You have substantial wiggle room on the offer and only going down 5,000 is nothing. Lowball them and see if they come back with another offer. If you miss out on the deal, no harm done--there are always more investments to be made.
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J ScottPro Member
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Investor · Sarasota, FL · Member since 2008 · 17k+ posts · 17k+ votes
12y
Originally posted by @Bob Bowling:
!. The flaw is that you think a cap rate predicts profitability. It does not. The market recognizes that. All it does is show a ratio of rents to price at ONE point in time. Why would anyone buy a commercial property at a 5 cap when there are plenty of 12 caps? Because the 5 caps are in profitable markets and the 12 caps not so much. In some markets ready willing and able investors will pay $1,000.000 for a $50,000 income stream and in other markets they will only pay $417,000 for the SAME income stream. Seems like the market is saying there is a preference for the 5 cap property. Why do you think they are wrong? I bet you can find "better, ha ha" OK higher cap rates in Dertoit. Why limit yourself to 12%? Probably the exact same reason 5 cap investors are avoiding the 12 caps. Now lets say you and I both have $500,000 to invest in a SFR. No doubt the numbers going in will show you having a higher cap rate. Now we have to replace the roofs in year 2. How much will I have to pay for my 12 square roof and how much will you have to pay for your 30 squares? Dang, that cap rate sure didn't take that into account like a lot of other things. So the answer is I invest where there is upside to rents and appreciation over my holding period and that results in the profitability I desire.

2. Please identify the reliable sources of NOI and cap rates for SFR's. And "at my Ma's house" is not an acceptable answer. Please post a link where I can find this information for say Surprise AZ or Podunk. It sounds like you are competing with yourself if you are only comparing properties that you are computing "cap rates" on at YOUR possible purchase price.

What other questions are you talking about? I've addressed 1 and 2 and working on 3.

1. I don't use cap rate to predict profitability (profitability is determined by a whole bunch of things that ultimately fall below the NOI line). I use cap rates to determine how long it will take to capitalize an asset, regardless of whether that asset is an apartment complex, a SFR, a business or some other cash flowing asset I'm considering buying. This time it takes to capitalize the asset is very important to me when I'm investing. Are you saying that cap rate can't be used to determine how long it takes to capitalize an asset?

Btw, to your question about "How much will I have to pay for my 12 square roof and how much will you have to pay for your 30 squares?" Given the cost of labor and materials where you are versus where I am, the answer is, "Probably about the same." Was that supposed to be a trick question?

2. In my markets, I'm a reliable source of information for SFR cap rates. In others markets, other active investors are reliable sources of information. As I mentioned earlier, single family homes are tremendously homogenous in most parts of the country. In specific areas, rents and vacancy (i.e., gross income) tends to be homogenous, as do utility costs, taxes, insurance and other operating expenses. It's very easy to compute average cap rates for single family houses -- much easier than for commercial properties where the true NOI will depend on management implementation. How is my derivation of SFR cap rates any different (better/worse/harder/easier) than that of a commercial property?

And the question you still haven't answered goes back to your very first obnoxious comment in this thread -- why do you believe cap rates don't apply equally to all cash flowing assets (i.e., they can't be used with single family houses the same way they're used with every other type of cash flowing asset)?
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Account Closed
Investor · Honolulu, HI · Member since 2013 · 3k+ posts · 1k+ votes
12y
1. I don't use cap rate to predict profitability (profitability is determined by a whole bunch of things that ultimately fall below the NOI line). I use cap rates to determine how long it will take to capitalize an asset, regardless of whether that asset is an apartment complex, a SFR, a business or some other cash flowing asset I'm considering buying. This time it takes to capitalize the asset is very important to me when I'm investing. Are you saying that cap rate can't be used to determine how long it takes to capitalize an asset?

YES YES YES EXACTLY!!!!. Do you really believe that your NOI is going to stay constant over 10-20 years? No rent increases, decreases? Flat expenses? In my over 30 years of experience and involvement with over $40,000,000 worth of properties have I ever heard a professional real estate investor talk about a cap rate in a length concept. "Yipee, Blackstone if we can get this at a 5.7 vs. a 5.2 we'll be "crapitalized" in ..oh ****, somebody do the math.. how many months "sooner" will that be?" Would you give some real numbers over your capitalize time on a property as an example?
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Account Closed
Investor · Honolulu, HI · Member since 2013 · 3k+ posts · 1k+ votes
12y
Btw, to your question about "How much will I have to pay for my 12 square roof and how much will you have to pay for your 30 squares?" Given the cost of labor and materials where you are versus where I am, the answer is, "Probably about the same." Was that supposed to be a trick question?

Now materials may be higher in Honolulu due to shipping costs but labor is probably comparable if not lower than a lot of mainland areas because of the paradise tax. In CA my materials are probably about the same as anywhere in the Midwest and immigrant labor is possibly even lower. So yes if you have more sf for the same NOI then your capital expenses for items bought/sold by sf will be higher.

The trick will be on you come carpet time.
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Account Closed
Investor · Singapore · Member since 2013 · 1k+ posts · 3k+ votes
12y
I just wanted to assert to @J Scott that I am by no means saying the 50% "rule" is generally applicable to calculating NOI. It is a good approximation for a certain class of properties. I have developed very detailed cost models that do take into account vacancy (detailed breakdown of those), long term capital improvements, rent increases, insurance cost increases etc etc and for the 700-900$/month properties in the states where I own, the numbers work out very close to 50%. Thats not to say its good for everyone. And totally irrelevant to the debate on CAP rate.

I also stated that Cap rates are not the whole story. And I understand that SFR's cannot always be priced by Cap rate. And I understand that markets determine cap rates.

I still maintain that Cap rate is a good way to compare assets. In the end you pay some capital for an asset (be it SFR, MFR, Stock, Bond, Gold, Tulips or beanie babies). Then that asset will generate some income (or not) and appreciate in value (or not). The total ROI will be combination of the total cash flow plus appreciation. Each asset will come with associated risks on both cash flow and appreciation. Folks, we are investing here. That means the future is basically unknown. So everything we do to predict future returns is based on some estimate or another. Cap rate comparisons are one way. In the end the only thing that matters is how many dollars you started with and how many you ended up with. I think thats something we can all agree on.
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Matt R.
Sherman Oaks, CA · Member since 2013 · 3k+ posts · 2k+ votes
12y
Originally posted by @Rick H.:
Matt Rosas - Maybe you make your money when you buy, however it's not always on the front end.

If the property could be purchased using selling financing, the cash flow and terms can be structured in an almost endless number of ways, both to make the deal cash flow positively quickly and some great back end profits, without necessarily requiring appreciation.

For example, a first trust deed for half the financing, whereby the payments don't start until a tenant is in place, and a second that doesn't require payments until the 1st is paid off, etc., etc. this is where it gets fun!

The point is to structure a deal with both the present and the future in mind. Expecting that the seller (or their heirs) will eventually return to the well and ask to be paid off early to pull more cash later is your opportunity to renegotiate yet another time.

Learn some great strategies by studying John Schaub, Jay Decima and Bill Tan. The real money is made in the back end.

GREAT info Rick, thanks. I was caculating 50% off arv from all in cost.

Thanks for your advice!

Matt

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J ScottPro Member
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Investor · Sarasota, FL · Member since 2008 · 17k+ posts · 17k+ votes
12y
Originally posted by @Account Closed:

The trick will be on you come carpet time.

I doubt that. For carpet we pay about $10/sf installed (30-35 ounce nylon plush). There's a reasonable chance the carpet you use (and other flooring) is made in the exact same place as the carpet we use...the difference is that that place is 45 minutes from where most of our rentals are, and we can drive up there and get it at about 35% of retail.

I've yet to find any place in the world that comes close on carpet prices as you can get in Atlanta (since much of the world's carpet is made in Dalton, 45 minutes north).
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J ScottPro Member
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Investor · Sarasota, FL · Member since 2008 · 17k+ posts · 17k+ votes
12y
Originally posted by Anish Tolia:
I just wanted to assert to @J Scott that I am by no means saying the 50% "rule" is generally applicable to calculating NOI.

Don't back down, Anish! :)

I actually think 50% is a great for a first-pass analysis. I've talked to landlords all around the country, and I consistently hear 45-55% when you factor in capex (which isn't typically factored into NOI) and professional management (even if it's not actually used). That range is surprising consistent across all kinds of locations and unit types.

Now, for commercial/multi-units, I've heard (I'm not in that space) numbers are all over the board -- from 30% for self storage to 80% for high-end vacation rentals, and probably everywhere in between. So, I wouldn't ever pick a blanket number for a commercial analysis.

But single family is easy -- don't let anyone tell you that 50% isn't a good for a first-pass analysis...anyone who does is likely either ignorant on single family rentals or just being argumentative.
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Account Closed
Investor · Honolulu, HI · Member since 2013 · 3k+ posts · 1k+ votes
12y
Originally posted by @Account Closed:
I just wanted to assert to @J Scott that I am by no means saying the 50% "rule" is generally applicable to calculating NOI. It is a good approximation for a certain class of properties. I have developed very detailed cost models that do take into account vacancy (detailed breakdown of those), long term capital improvements, rent increases, insurance cost increases etc etc and for the 700-900$/month properties in the states where I own, the numbers work out very close to 50%. Thats not to say its good for everyone. And totally irrelevant to the debate on CAP rate.
I also stated that Cap rates are not the whole story. And I understand that SFR's cannot always be priced by Cap rate. And I understand that markets determine cap rates.

I still maintain that Cap rate is a good way to compare assets. In the end you pay some capital for an asset (be it SFR, MFR, Stock, Bond, Gold, Tulips or beanie babies). Then that asset will generate some income (or not) and appreciate in value (or not). The total ROI will be combination of the total cash flow plus appreciation. Each asset will come with associated risks on both cash flow and appreciation. Folks, we are investing here. That means the future is basically unknown. So everything we do to predict future returns is based on some estimate or another. Cap rate comparisons are one way. In the end the only thing that matters is how many dollars you started with and how many you ended up with. I think thats something we can all agree on.

@Account Closed

I think you are back tracking a bit on this as you've repeatedly responded to posters with a NOI as 50% of gross rents regardless of the value or market. But let's get past that. I don't see why you haven't embraced "Anishtimated" value, 50% of gross rents/price= Anishtimated value. My argument was only against calling this formula a cap rate. I love anishtimated value. We do it all the time at my favorite Honolulu pub. Hey, what's the Anishtimated value of......? And the winner is the person that comes up with the most convoluted computation. I'll admit that sometimes this gets out of hand and ends with someone saying, "Oh yeah, Anishtimate this!" but you gotta expect that when you get a bunch of 59,5 year olds together and add a few beers. If you come to town I can guarantee you as the Anishtimator will get free Mai Tais til you puke! ;-)

As to your statement, "I still maintain that Cap rate is a good way to compare assets." please post JUST one of your comparisons so that we can all see the validity of your statement. I'm still susKeptible but maybe you can learn an old dog a new trick.
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Account Closed
Investor · Honolulu, HI · Member since 2013 · 3k+ posts · 1k+ votes
12y
Originally posted by @J Scott:

Originally posted by @ANISH TOLIA:
I just wanted to assert to @J Scott that I am by no means saying the 50% "rule" is generally applicable to calculating NOI.

Don't back down, Anish! :)

I actually think 50% is a great for a first-pass analysis. I've talked to landlords all around the country, and I consistently hear 45-55% when you factor in capex (which isn't typically factored into NOI) and professional management (even if it's not actually used). That range is surprising consistent across all kinds of locations and unit types.

Now, for commercial/multi-units, I've heard (I'm not in that space) numbers are all over the board -- from 30% for self storage to 80% for high-end vacation rentals, and probably everywhere in between. So, I wouldn't ever pick a blanket number for a commercial analysis.

But single family is easy -- don't let anyone tell you that 50% isn't a good for a first-pass analysis...anyone who does is likely either ignorant on single family rentals or just being argumentative.

But @J Scott

@J Scott you said the reason you computed a cap rate on a SFR was to determine the LENGTH of time to "capitalize" your property for whatever reason and still have not responded to my response to this. Actually it seems to me that you are purposely trying to derail this conversation. Can we stay focused please?
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Account Closed
Investor · Honolulu, HI · Member since 2013 · 3k+ posts · 1k+ votes
12y
Originally posted by @J Scott:

Originally posted by @Account Closed:
The trick will be on you come carpet time.

I doubt that. For carpet we pay about $10/sf installed (30-35 ounce nylon plush). There's a reasonable chance the carpet you use (and other flooring) is made in the exact same place as the carpet we use...the difference is that that place is 45 minutes from where most of our rentals are, and we can drive up there and get it at about 35% of retail.

I've yet to find any place in the world that comes close on carpet prices as you can get in Atlanta (since much of the world's carpet is made in Dalton, 45 minutes north).

My brother in law can do better than that but it would cause a family rift if I posted actual dollar amount. Uh, you do realize I used "carpet" just to represent any expense based on sf?
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J ScottPro Member
Moderator
Investor · Sarasota, FL · Member since 2008 · 17k+ posts · 17k+ votes
12y

I started this conversation asking you to justify the very first comment you made in this thread -- your implication that cap rate is appropriate for other cash flowing investments other than single family houses. I've asked you many times since to justify that statement. You've ignored me (or dodged the question) every single time.

We can talk about anything you want afterwards (I'll answer any of your questions), but first you need to explain to me why cap rate is an appropriate tool every type of cash flowing asset other than single family investment properties. What is the inherent difference between single family investment properties and every other asset class that makes cap rate an inappropriate tool just for single family.
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J ScottPro Member
Moderator
Investor · Sarasota, FL · Member since 2008 · 17k+ posts · 17k+ votes
12y

Didn't realize that...where I come from the word carpet generally refers to carpet.
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