Safer areas to invest in for rental ?
marly le roi, yvelines · Member since 2012 · 9 posts · 2 votes
Following my first post when I asked some advices on a new start for our family run LLC based in France, here's another question for you guys. Thanks for those who helped us already !
We invested in Florida, were looking into Austin but we did some other researchs and the taxes are really on the high end in Texas ! (as for California and New york it seems)
Our goal is to invest on rental properties (we can't flip from France) with very low expenses in a safe area. We have around 400k $ and like to be around 8-9 cap rate.
What's the catch with Memphis and Atlanta ? Low appreciation ? The cap rate are higher than everywhere else.
Colorado, Arizona ?
We'd like to keep this investment as a nice cashflow. Thoughts as well as property listings offer appreciated.
please email at loic<a>banzaii.fr
@Account Closed I think Loic is referring to cap rate as a simple metric of Rent Revenue minus expenses / purchase cost. Some sellers will include estimated vacancy and maintenance, typically 8 to 10% a piece. Some call it a cap rate, others will call in cash on cash. Some very popular sites like Property Tracker and Real Yields that investors use to evaluate property will call it cap rate. I think the main thing is for investors to have some sort of numerical value, regardless of what the seller calls it, to evaluate property.
@Loic Billiau if you own single family residential and after 5 years, you made 10% return, then I would consider that doing well. Mix in a blended rate of equity created by tenant, tax breaks and appreciation, then your return is much higher. Many investors do not consider the blended return, but for me and my strategy, the blended return makes it worth it. I was able to depreciate (off the top of my head) over 100k last year, meaning, my taxable income was 100k less even though I turned a profit on my rentals. Of course, once you sell, then you have to recoup, but my plan is to pay off, then hand down to my heirs when my time comes. To answer your question about Memphis, there is not much appreciation here as it is a very lineal market.Cash flow is what brings people here. I own 19 doors and getting ready to add 3 more this month.
Why type of commercial property are you buying?
just SFR or multiplex, well that's the main idea. We're open to everything, that said.
just SFR or multiplex, well that's the main idea. We're open to everything, that said.
There are no cap rates on SFR's or small multiplex's and it is not a profit metric. They are used for commercial properties AND to scam novice investors. If you buy investment property of this type based on the sellers CLAIMED "cap rate" you can say au revoir to your money.
Hmm.. The money we invested in Tampa did fructified though. Maybe cap rate isnt the right term. As you said, we are pretty young in american market (but not in France where the income from rental cannot compete with what we can find in the us)
What I mean by cap rate is annual NOI / money invested. Am i getting this wrong ?
Hmm.. The money we invested in Tampa did fructified though. Maybe cap rate isnt the right term. As you said, we are pretty young in american market (but not in France where the income from rental cannot compete with what we can find in the us)
What I mean by cap rate is annual NOI / money invested. Am i getting this wrong ?
Yes. It is one year NOI/purchase price. The higher that ratio (cap rate) the less the market is willing to pay for the NOI. It is used to value commercial properties.
$10,000 NOI sold for $100,000 equals a 10% cap rate.
$10,000 NOI sold for $200,000 equals a 5% cap rate.
Obviously the 5% cap rate property is more desirable to the market. It may not be the more profitable property but a cap rate is not designed to give you that information.
Scammers want you to believe that the 10% is a return and is more desirable when in fact the opposite is true. Don't let yourself be scammed.
@Account Closed I think Loic is referring to cap rate as a simple metric of Rent Revenue minus expenses / purchase cost. Some sellers will include estimated vacancy and maintenance, typically 8 to 10% a piece. Some call it a cap rate, others will call in cash on cash. Some very popular sites like Property Tracker and Real Yields that investors use to evaluate property will call it cap rate. I think the main thing is for investors to have some sort of numerical value, regardless of what the seller calls it, to evaluate property.
@Loic Billiau if you own single family residential and after 5 years, you made 10% return, then I would consider that doing well. Mix in a blended rate of equity created by tenant, tax breaks and appreciation, then your return is much higher. Many investors do not consider the blended return, but for me and my strategy, the blended return makes it worth it. I was able to depreciate (off the top of my head) over 100k last year, meaning, my taxable income was 100k less even though I turned a profit on my rentals. Of course, once you sell, then you have to recoup, but my plan is to pay off, then hand down to my heirs when my time comes. To answer your question about Memphis, there is not much appreciation here as it is a very lineal market.Cash flow is what brings people here. I own 19 doors and getting ready to add 3 more this month.
Thanks for your insight to both of you.
Yes it would be maybe more accurate to call it cash on cash.
Well Memphis does seem to have interesting properties to buy if one's interested in cashflow. I will take a look at your website.
@Account Closed I think Loic is referring to cap rate as a simple metric of Rent Revenue minus expenses / purchase cost. Some sellers will include estimated vacancy and maintenance, typically 8 to 10% a piece. Some call it a cap rate, others will call in cash on cash. Some very popular sites like Property Tracker and Real Yields that investors use to evaluate property will call it cap rate. I think the main thing is for investors to have some sort of numerical value, regardless of what the seller calls it, to evaluate property.
A cap rate is a cap rate. If you call something else a cap rate that does NOT make it a cap rate.
You state, "I think the main thing is for investors to have some sort of numerical value, regardless of what the seller calls it, to evaluate property."
How does having some fake cap rate number accomplish this?
@Account Closed For me personally, if I get a email on a SFR that returns 12%, then that gives me my first benchmark to evaluate and at 12% I am interested. If I hear 4% on SFR, then I know to delete email. No different then when playing golf and the yardage marker on the tee box says 175 Yard Par 3. I know that tee box markets and pin get moved all the time, so if I want exact yardage, I pull out my yardage finder to know exactly how far the pin is away. Most of the time, all that extra work in golf does nothing but waste everyone's time as I am terrible, but in real estate, knowing where to start is just that, a start of your due diligence. I am developing a new site for my company and I am leaving off everything outside of the known cost which is price, monthly mgmt expense, taxes and insurance. I will leave it to the investors to plug in their own expenses.
Even on Commercial property, the Cap Rate is generated by the seller. Just because someone in a commercial transaction tells you what a cap rate is, you still have to figure out for yourself if that cap rate is realistic.
@Loic Billiau we are updating our website and hit snag where it will be delayed one week. Unfortunately the old site does not reflect current programs and inventory. PM me and I can send you a sneak preview to new site that is more relevant.
Thanks for your insight to both of you.
Yes it would be maybe more accurate to call it cash on cash.
Well Memphis does seem to have interesting properties to buy if one's interested in cashflow. I will take a look at your website.
Cash on cash is the ratio of the cash flow to the cash/equity into the project. On a normal financed property the equity would only be 20-25% of the property value.
The cap rate is the ratio of the NOI to the FULL market value of the property.
Completely different and should not be confused.
The advertised "CRAP RATES" by the scammers are not reporting cash on cash. They are calculating a cap rate (more than likely incorrect) and reporting it as a "return" to unsuspecting investors. Just check out the Marketplace and you will see all these unsupported and ridiculous cap rate claims.
@Loic Billiau we are buying in Memphis strictly for Cash Flow and any appreciation would be a bonus. I just bought a brand new construction home with $303 cash flow after all expenses and debt service. Lets talk!
"The cap rate is the ratio of the NOI to the FULL market value of the property."
That's pretty meaningless to a B and H investor. What your formula highlights is lost opportunity cost perhaps but it certainly isn't a number to use for return on investment.
If I can buy an 80,000 house for $50,000 then I am concerned about the return on my cash. Not what the return would be if I had paid too much. How is that number of any use at all?
I agree with @Alex Craig that cap rates are a good metric to start with. The cap rate is the unlevered yield on an investment property and is useful in determining a property's cash flow regardless of financing used. Properties can be purchased with cash, or financed many different ways but the operating fundamentals remain unchanged. This is what makes the capitalization rate a good metric to compare different investments. Many advertised cap rates on properties being marketed are overstated because income is overstated or expenses are understated, but this is not because there is anything wrong with how cap rates are calculated. The true income and expenses (and true cap rate) can be flushed out during due diligence.
Ohio has come great cash flowing properties
"The cap rate is the ratio of the NOI to the FULL market value of the property."
That's pretty meaningless to a B and H investor. What your formula highlights is lost opportunity cost perhaps but it certainly isn't a number to use for return on investment.
If I can buy an 80,000 house for $50,000 then I am concerned about the return on my cash. Not what the return would be if I had paid too much. How is that number of any use at all?
First it is not MY formula.
Second, it is not useful for your $50,000 house because there are no cap rate comps.
Third, few properties sell for almost 38% discount if they are in marketable condition. Those property's NOI would sell for the same cap rate and a cost to cure adjustment would be subtracted below the line.
Finally CAP RATE IS OF ABSOLUTELY NO USE AT ALL FOR SFR'S AND SMALL MULTI'S! It is useful when valuing commercial properties that at encumbered by long term leases that are above or below market. Commercial investors WOULD LOVE to be able to use direct sales comparison to value properties because it is easier and MORE accurate. Why do little "investors" so desperately want to use this metric? They think it makes them look "smarter" and/or they know they can use it to SCAM novice investors. Look at all the Turnkey companies that advertise on the Marketplace 14%!!!! cap rate. What a joke. They can't even explain what that means. They just know that it lures you because you think it is a return you will earn.
"Third, few properties sell for almost 38% discount if they are in marketable condition."
Absolutely not true. We find them in Memphis all the time.
And it seems you are mixing up 2 things now. You are now talking about CAP rates to value a property and CAP rates as return on investment. In residential they are unrelated. If I can buy a heavily discounted SFR and get a great yield then I just want to know what the yield is so I can decide whether to buy it. Knowing that IF I paid full price the yield would only be XX% is of no interest to a residential investor.
Or am I missing something?
Or am I missing something?
Yes that you are confusing a cap rate as a yield. How is appreciation/depreciation/capex/etc. factored in there. How would you know if you are overpaying for the "yield"? You can divide NOI by a number but it is not a cap rate.
"Third, few properties sell for almost 38% discount if they are in marketable condition."
Absolutely not true. We find them in Memphis all the time.
Or am I missing something?
If there is a supply of these properties "all the time" then the sales price IS market value. You are only fooling yourself in thinking you are getting a discount.
Sorry Bob that may be a language thing as I am not American. I differentiate between gross and net yield. So when I look at any property I am only interested in net yield.
Which is rental income less vacancy, management fees, taxes, insurance and maintenance. But that still has zip to do with the full market value of the property which is what you were referring to. For example the property below is worth $150,000. But why do I care when I am buying it for 90K?
For example:
| CASH NUMBERS | ||
| Purchase Price | $90,000 | |
| Closing costs | $5,000 | |
| Total cash investment | $95,000 | |
| Weekly rent | $323 | $16,800 |
| Vacancy rate | 5.00% | $840.00 |
| Management Fees | 8.00% | $1,344.00 |
| Property tax rate | ! | $2,000.00 |
| Insurance | $200 | $1,000 |
| Maintenance | ! | $2,500.00 |
| SUB | ! | $7,684.00 |
| Total Net Cashflow | $9,116.00 | |
| Weekly Cashflow | ! | $175.31 |
| Gross Yield on Investment | 17.68% | |
| Net Yield on Investment | 9.60% |
Gents I think Bob made his point. I was wrong using a term not fitted to speak of SFR and multi property investment.
That said, I'm eager to know wich term I should use when I want to speak of my return and the ratio between the inital purchase value and what you get of it each year.
@Loic Billiau You are not wrong. Cap rate is exactly what you are looking for if you want to describe NOI/Purchase Price. $10K NOI / $100K Purchase Price = 10% cap rate. At first glance I look at the cap rate, location, and condition/quality of construction to narrow down properties I'm interested in. You can calculate your cash-on-cash return once you know the details of the financing that are available. As @Dean Letfus pointed out the "market price" is irrelevant to calculating your yield if you are paying a different price (hopefully below market price).
@Loic Billiau You are not wrong. Cap rate is exactly what you are looking for if you want to describe NOI/Purchase Price. $10K NOI / $100K Purchase Price = 10% cap rate. At first glance I look at the cap rate, location, and condition/quality of construction to narrow down properties I'm interested in. You can calculate your cash-on-cash return once you know the details of the financing that are available. As @Dean Letfus pointed out the "market price" is irrelevant to calculating your yield if you are paying a different price (hopefully below market price).
Here is what @Loic Billiau stated that I said was wrong, " What I mean by cap rate is annual NOI / money invested. Am i getting this wrong ?"
The cap rate is not a profit metric. The higher the cap rate the less is being paid for the NOI. WHY would the market pay more for NOI is it is less profitable? It is a risk measurement.
The yield of an investment is tied to the risk associated with the aforementioned investment. The higher the risk is considered to be, the higher the associated yield potential. Except in the most secure investments, such as zero coupon bonds, a yield is not a guarantee.
Now @Josh D says he is looking at cap rates at first glance but there is no cap rate until there is a sale. Using asking prices is just a waste of time. Now if it were a commercial property with verifiable cap rate comps then EVERY property is a viable opportunity AT MARKET CAP RATE. With that cap rate and the property's NOI all you have to do is take ANY property REGARDLESS of asking price and come up with the market value.
Don't let ANYONE tell you that market price is not important. Shucks, I'll sell you properties at your desired 9% cap rate all day long in a 12% cap rate market. Do the math. You'd be getting screwed.