Low Cap rate - bad deal?

1 Reply

I'm considering a two story duplex in a subdivision that is zoned R2 residential. I intend to make an offer subject to my getting rezoning or special use permit. I have met with zoning and, hopefully, at the conclusion of a 45 day or so process, I will get a transferable special use exception and close on the house. My question, though, pertains to cap rate. I hope to buy the house for about $65K and put about $40K into improvements. I have a private lender who will fund me initially, then when the work is complete, I will get a mortgage thru a portfolio lender near me for 70% LTV assuming an ARV of $150K. If the cap rate is NOI/market value of the property ($1,040 x 12/$150,000), then the cap rate for this property is only 8.3. That seems so low to me but I am allowing 10% vacancy, 10% repairs and 15% CapEX. I could reduce one or more of those a bit to increase the cap rate but that sounds like I'm forcing an outcome. Also, since I'm using OPM, my cash on cash return is really infinity right? My monthly cash flow (pre-tax after debt service) would be about $610. Does this sound like a good deal or am I missing something?

Your cap rate isn't relevant in this situation.  Cap rate in general is only pertinent to MF and even then isn't the best metric IMHO.

What's relevant in your situation is that you are putting in 105k and getting out 105k, so the only thing you need to care about is having positive cashflow after debt services, tax, insurance, vacancy, repair/capex budget.

You would pass on this if the loan you are taking out is mutually exclusive with a loan you would take out on another property with better numbers.