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
But, as long as we are on wild *ss tangents I'll admit you got me thinkin. So at a 12 cap I could give somebody in Georgia, or where ever these 12 caps are, say $20,000 to buy me a $100,000 SFR at a 12 cap and THEY would send me $12,000 each and every year and I would be "capitalized" in what, 8+ years?

But @J Scott I'm in Honolulu and Cali. If only there were companies that could identify these properties for me and invest and manage for me and MOST importantly send me the $12,000 each year. Dang, I could take a $100,000 HELOC on just one of my properties and get myself an extra $60,000 a year. Man, that could take care of my bar tab pretty quick. But, if only.....
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J ScottPro Member
Moderator
Investor · Sarasota, FL · Member since 2008 · 17k+ posts · 17k+ votes
12y
Originally posted by @Account Closed:
But, as long as we are on wild *ss tangents I'll admit you got me thinkin. So at a 12 cap I could give somebody in Georgia, or where ever these 12 caps are, say $20,000 to buy me a $100,000 SFR at a 12 cap and THEY would send me $12,000 each and every year and I would be "capitalized" in what, 8+ years?
But @J Scott I'm in Honolulu and Cali. If only there were companies that could identify these properties for me and invest and manage for me and MOST importantly send me the $12,000 each year. Dang, I could take a $100,000 HELOC on just one of my properties and get myself an extra $60,000 a year. Man, that could take care of my bar tab pretty quick. But, if only.....

Once again avoiding my question above...

Oh, and drinking $60K per year in beer?

Now it all makes sense... ;-)
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Account Closed
Investor · Honolulu, HI · Member since 2013 · 3k+ posts · 1k+ votes
12y
Originally posted by @J Scott:

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.

NO, you are the one changing things. You even numbered them to help an old man out. Now you want to trix me. Elder Abuse! Elder Abuse! If this was so important to you why didn't YOU make it NUMBER 1? I've really already answered it but wanted this to be an orderly discussion. I will expound on them later after we follow YOUR stated priority.

1. No standard calculation by owners or investors of SFR's

2. No reliable public source/publications of analysis of cap rate comps for SFR's.

3. The market does NOT recognize cap rates for SFR's.

Now can we please have an orderly discussion. Hell, I'll let you change your priorities once. Will that make you happy?
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Account Closed
Investor · Honolulu, HI · Member since 2013 · 3k+ posts · 1k+ votes
12y
Originally posted by @J Scott:
Oh, and drinking $60K per year in beer?

Now it all makes sense... ;-)

That's only $5,000 a month and I just said it was my tab. I can be generous at a 5 cap. Why you so tight with your 12 ? Remember my goal is to get Anish to puke on Mai Tais! They don't hand out them umbrella drinks for free. Alooooooooha! ;-)
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J ScottPro Member
Moderator
Investor · Sarasota, FL · Member since 2008 · 17k+ posts · 17k+ votes
12y
Originally posted by @Bob Bowling:
Hell, I'll let you change your priorities once. Will that make you happy?

Yes, that will make me happy.

New order of priorities:

1. You justifying the very first statement you made in this thread.

2. Anything else you want to talk about.

Btw, at first I thought you were joking when you made your argument that cap rates don't work for single family houses because I can't find an Internet link for the cap rate in Surprise, AZ...but you said it again, so I'll assume you really believe that.

If you really believe that, can you give me a link that tells me the cap rate of private nursing facilities in Surprise, AZ? If not, are you telling me that cap rates aren't applicable to private nursing facilities?

Also, are you arguing that cap rates were completely irrelevant before the Internet existed and there were no links to anything?
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Steve B.
Engineer · Portland, OR · Member since 2014 · 1k+ posts · 1k+ votes
12y
J Scott I'm not sure it's a good use of your time arguing with guys like Bob and Seth. You obviously know your stuff and lend them legitimately by debating them with their desultory and incoherent talking points. I'm pretty sure these guys lost their capital investing in Beanie Babies in the 90's and have yet to recover from that financial hit.
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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:
Hell, I'll let you change your priorities once. Will that make you happy?

Yes, that will make me happy.

New order of priorities:

1. You justifying the very first statement you made in this thread.

2. Anything else you want to talk about.

Btw, at first I thought you were joking when you made your argument that cap rates don't work for single family houses because I can't find an Internet link for the cap rate in Surprise, AZ...but you said it again, so I'll assume you really believe that.

If you really believe that, can you give me a link that tells me the cap rate of private nursing facilities in Surprise, AZ? If not, are you telling me that cap rates aren't applicable to private nursing facilities?

Also, are you arguing that cap rates were completely irrelevant before the Internet existed and there were no links to anything?

Damn you're a demanding mistress. No wonder @Ben Leybovich

prefers @Brandon Turner for his bromance. OK new priorities. I'm assuming you are referring to the statement that you have called obnoxious multiple times as my first statement.

LoopNet reports cap rates for assisted and nursing homes in Surprise but don't do much of an analysis. I'm mostly familiar with Class A office space and Korpacz is my go to source. They do most metro areas for most commercial office/industrial properties. I'm sure they do the same for the nursing home industry.

I asked for a link because we are communicating on the internet. Were this being done by mail or smoke signal then that's how I'd expect the return communication.

Mahalo for your continued participation but can we please keep it more focused and more of an even exchange? It's a great day in the Bay Area and I'm only here a few weeks and you got me thinking about Happy Hour so I'm bailing til later or tomorrow. Meanwhile will you please respond to all of my posts that were in response to your questions? aloha
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Account Closed
Investor · Honolulu, HI · Member since 2013 · 3k+ posts · 1k+ votes
12y
Originally posted by @Steve B.:
J Scott I'm not sure it's a good use of your time arguing with guys like Bob and Seth. You obviously know your stuff and lend them legitimately by debating them with their desultory and incoherent talking points.
I'm pretty sure these guys lost their capital investing in Beanie Babies in the 90's and have yet to recover from that financial hit.

Stevie, it's a shame that the quality of your posts isn't better considering the low quantity. And why do you use so many of the few that you have attacking me? I bet I might know you if you posted all your internet names. Any way enough about you well except for what you're seeking in your profile, "SFR out of state from 75-100k that cash flow a GRM of 1.2-1.5". If you can explain that to me maybe I can pull something out of my akole for you. ;-) Aloha
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J ScottPro Member
Moderator
Investor · Sarasota, FL · Member since 2008 · 17k+ posts · 17k+ votes
12y
Originally posted by @Bob Bowling:
Mahalo for your continued participation but can we please keep it more focused and more of an even exchange? It's a great day in the Bay Area and I'm only here a few weeks and you got me thinking about Happy Hour so I'm bailing til later or tomorrow. Meanwhile will you please respond to all of my posts that were in response to your questions? aloha

Okay, I just got off the phone with @Ben Leybovich and we had a good laugh about this thread...and no, we weren't laughing at anyone (well, he was laughing at me)...we were just laughing at the fact that this threads just keeps going around and around...

I'm going to vote that we call a truce and move on...

I will say @Account Closed that I thought you were a bit obnoxious and condescending at the beginning of this thread. Your first comment -- right or wrong -- didn't offer any particular insight and your next few comments after that were more bashing than informative. Based on everything you've written to me these last few pages, you clearly know what you're talking about and have some great experience and insight...I'm sure the original poster (and the rest of us) would have benefitted much more from that nicely communicated insight than from the one sentence sarcastic responses that you started with.

Okay, that's all for my lecture... :)

Btw, if by Bay Area you mean Northern California, have fun...I lived there for a long time...
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Account Closed
Investor · Singapore · Member since 2013 · 1k+ posts · 3k+ votes
12y
I am not posting anymore for @Account Closedbenefit. You cannot argue with religious fanatics. I have not back tracked in any way. If someone posts a "is this a good deal" thread on BP and I respond with a rough opinion based on 50% expense ratio that does not mean I do that blindly on properties I actually purchase. As @J Scott says the actual data seems to suggest 50% is a good rough estimate and a good screening tool. Okay, thats my final word on this thread. I will also not reply any more baiting from Bob.
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Rick Baggenstoss
Developer · Decatur, GA · Member since 2011 · 1k+ posts · 1k+ votes
12y
I'm pretty sure after reading this string @Account Closed is a new name for an old heckler. Same style and tone as a previously booted poster ... a who claimed he was from Chicago, I believe.

@J Scott I think cap rate is another indicative metric like P/E, IRR, ROI and the 50% rule.

@Ben Leybovich, and even better, @Bryan Hancock, pointed out a schedule for discounted cash flows all the way to your exit using WACC would be much more accurate. It may be that your cost of capital is going up (if interest rates were increasing) or that for new construction you were able to get a bank loan at 5% vs. a private loan for 10%. Or if you major maintenance items were 10 years out vs. 1 year out. You'd get different results. Cap rate wouldn't help as much.
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Account Closed
Investor · Honolulu, HI · Member since 2013 · 3k+ posts · 1k+ votes
12y
Originally posted by @Rick Baggenstoss:
I'm pretty sure after reading this string @Account Closed is a new name for an old heckler. Same style and tone as a previously booted poster ... a who claimed he was from Chicago, I believe.

@J Scott I think cap rate is another indicative metric like P/E, IRR, ROI and the 50% rule.

@Ben Leybovich, and even better, @Bryan Hancock, pointed out a schedule for discounted cash flows all the way to your exit using WACC would be much more accurate. It may be that your cost of capital is going up (if interest rates were increasing) or that for new construction you were able to get a bank loan at 5% vs. a private loan for 10%. Or if you major maintenance items were 10 years out vs. 1 year out. You'd get different results. Cap rate wouldn't help as much.

Then you'd be wrong. If you'd like to start a thread to discuss your point, if you have one, I'd be happy to participate. Otherwise you're late to this discussion and your motive is questionable at best.
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Rick Baggenstoss
Developer · Decatur, GA · Member since 2011 · 1k+ posts · 1k+ votes
12y
@Account Closed It's not your thread and I made a point. Don't you get it? Cap rate ain't all that. Try reading past your name.
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Account Closed
Investor · Honolulu, HI · Member since 2013 · 3k+ posts · 1k+ votes
12y
Originally posted by @Rick Baggenstoss:
@Account Closed It's not your thread and I made a point. Don't you get it? Cap rate ain't all that. Try reading past your name.

You're the one that tried to bring my name into your paranoia. Do you have something to say to me?
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Rick Baggenstoss
Developer · Decatur, GA · Member since 2011 · 1k+ posts · 1k+ votes
12y
@Matt R. Did I miss your ARV? Sounds like you'll hold it for awhile, but I'm curious what you could sell it for after your planned improvements.

1BA with 1340 sf sounds like you could add value with a 2nd bath.

Since it was built in the 50's and long-term owner, do you have a W/D connection in a thoughtful location? Still have a closed, choppy floor plan? Blue or pink tile bath? :-)

Is this a 1 or 1.5 story? I'm trying to visualize how you could make it more appealing and get the higher rent. If you're going to keep it for awhile, then it might make sense to correct some of the 50's flaws.
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Matt R.
Sherman Oaks, CA · Member since 2013 · 3k+ posts · 2k+ votes
12y
For sure Rick. This is not my deal though. I was commenting on more of a target philosophy. Buy at 50% arv all in for 50% equity gain is target goal.

Gives comfortable option to flip, hold or refi.

Thanks,

Matt
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Account Closed
Investor · Honolulu, HI · Member since 2013 · 3k+ posts · 1k+ votes
11y
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).
Thanks to a recent forum vote I got to relive this crazy thread. I had intended to reply to this but...well I got distracted! @J Scott said he paid $10per sf for carpet installed. That's $90 per square yard! Here's 2015 costs.. http://www.homewyse.com/services/cost_to_install_c...
Low to high $3.35-$4.36. Kinda puts the whole discussion into perspective.
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Mike WilliamsPro Member
Real Estate Broker · Dalton, GA · Member since 2010 · 244 posts · 35 votes
11y
Hi guys, J Scott meant that he pays $10 sq/yard for carpet installed. I'm located here in Dalton, the Carpet Capital of the World. I get carpet for about $4.50/yd (good, first quality stuff), and all in I'm around $7-8 sq/yd...but i know people. :)
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J ScottPro Member
Moderator
Investor · Sarasota, FL · Member since 2008 · 17k+ posts · 17k+ votes
11y
Sorry, meant $10/sy...or about $1.10/sf...
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Ben Leybovich
Rental Property Investor · Phoenix/Lima, Arizona/OH · Member since 2012 · 4k+ posts · 4k+ votes
11y
@Rick Baggenstoss
I agree - the CAP Rate as a metric is very limited by the fact that it's static. We use CAPs to underwrite the behavior of the marketplace at a given time, but as a metric of return it's hardly any better than CCR. Time, and forces which act upon the cash flows over that time, in the end always play a large role, none of which is captured by the CAP Rate...
I sense a future article, y'all :)
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Account Closed
Investor · Honolulu, HI · Member since 2013 · 3k+ posts · 1k+ votes
11y
Originally posted by @Ben Leybovich:
@Rick Baggenstoss
as a metric of return it's hardly any better than CCR.
I sense a future article, y'all :)
Exactly Ben but despite bad definitions on investopedia a cap rate IS NOT meant to be a measure of return/profitability any more than a dollar cost per square foot is.
If you tell me you bid $100 per square foot on a property that tells me nothing. Same as if you tell me you are buying a NOI at a 12% cap, NOTHING.
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Account Closed
Investor · Honolulu, HI · Member since 2013 · 3k+ posts · 1k+ votes
11y
Originally posted by @Ben Leybovich:

@Rick Baggenstoss
as a metric of return it's hardly any better than CCR.
I sense a future article, y'all :)
Exactly Ben but despite bad definitions on investopedia a cap rate IS NOT meant to be a measure of return/profitability any more than a dollar cost per square foot is.
If you tell me you bid $100 per square foot on a property that tells me nothing. Same as if you tell me you are buying a NOI at a 12% cap, NOTHING.
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Ben Leybovich
Rental Property Investor · Phoenix/Lima, Arizona/OH · Member since 2012 · 4k+ posts · 4k+ votes
11y
Originally posted by @Account Closed:

Originally posted by @Ben Leybovich:

@Rick Baggenstoss
as a metric of return it's hardly any better than CCR.
I sense a future article, y'all :)
Exactly Ben but despite bad definitions on investopedia a cap rate IS NOT meant to be a measure of return/profitability any more than a dollar cost per square foot is.
If you tell me you bid $100 per square foot on a property that tells me nothing. Same as if you tell me you are buying a NOI at a 12% cap, NOTHING.
No disagreement. The resason btoh per sq.ft and CAP tell you very little is because neither speaks of the delta. We can't begin to have an apples to apples conversation without defining the delta, which, by definition, is not possible with either :)
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Account Closed
Investor · Honolulu, HI · Member since 2013 · 3k+ posts · 1k+ votes
11y
Originally posted by @Ben Leybovich:
Originally posted by @Account Closed:

Originally posted by @Ben Leybovich:

@Rick Baggenstoss
as a metric of return it's hardly any better than CCR.
I sense a future article, y'all :)
Exactly Ben but despite bad definitions on investopedia a cap rate IS NOT meant to be a measure of return/profitability any more than a dollar cost per square foot is.
If you tell me you bid $100 per square foot on a property that tells me nothing. Same as if you tell me you are buying a NOI at a 12% cap, NOTHING.
No disagreement. The resason btoh per sq.ft and CAP tell you very little is because neither speaks of the delta. We can't begin to have an apples to apples conversation without defining the delta, which, by definition, is not possible with either :)
But we can make market comparisons. For instance a property just sold in my building for $1,825 a square foot. I bought in 2008 (before the GFC) at slightly less than $1,000 a sf. Not quite double but I've got three more years! Dang, my price to rent ratio just got screwed. ;-)
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Ben Leybovich
Rental Property Investor · Phoenix/Lima, Arizona/OH · Member since 2012 · 4k+ posts · 4k+ votes
11y
And what you described is the blessing of a land-locked market. No skill requirements :)
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