Is 5.8% Cap rate ok in Class B area?

Question

Rental property in class B area.

Current cap rate is 5.8%.

These are not the actual numbers, but is the actual percentage and actual ratio:

I invested $x.xx (say invested $59,000).

The $59,000 equality has grown to $100,000.  (I have made 69% appreciation so far.)

Let say my NOI is $5,800 per year.

So my current cap rate is 5.8%.

Does it sound ok in class B area? or is the cap rate a little bit too low?

Account Closed · Answer

At the very beginning long time ago.  I had property manager before.

Using property manager may have higher vacancies, because property manager would take their time to look for the next new tenant.  Property manager would not work as hard as the landlords.

Property manager would wait for the property to be vacant first, then list it for rent when it is vacant, then look for a new tenant, it may create one month vacancy.

If landlord manage the properties themselves, once the old tenant give a 30-days move-out notice to the landlord, I would list it for rent online immediately, schedule showings before the old tenant move-out.  It is harder to schedule showings while the property is occupied; however, it is worth the hard working.  Because it can shorten the vacany period.

Account Closed · Answer

That is not a small multifamly.

It is the average cap rate of my portfolio consists a mixtures of SFR, townhomes, and condo.

After each puchase, I fixed up, inspected and replaced all old plumbling by new parts (e.g. shower cartridges, spout, faucets, chalking, all types of angle valves - toilet valve, bathsink valve, kitchen valve, washer valve-, water heater, plus others etc.) for all rentals.  Almost maintenance free because I did most of the maintenance at the beginning of the purchase.

On a new purchase, I am wiling to spend money replacing an old part even though it still work fine.

So less headache later on.

I managed all properties by myself, no manangement fee.

I have been working hard, have showings that fit both old tenants and new tenants' schedule.

98% of the time, I am able to find a new tenant move-in immediately after the old tenant move-out.

For example, old tenant move-out on July 31.  New tenant move-in on August 1.

Almost zero vacancies.

Since SFR/townhomes/condo are apple/orange/banana, it is hard to have a fair average cash flow on these different animals.

But my portfolio total cash flow can provide me an income that is more than my last W-2.

I'm happy working 100% full-time managing the portfolio myself.

Immanuel Sibero · Answer

Account Closed pointed out, cap rate is dependent on the local market. Cap rate is commonly used in commercial and multifamily space (i.e. 5 unit or more). From your post, seems to me that you calculate the "cap rate" of your single family properties portfolio every year. I'm not sure what information you can gain from it.

To me, calculating cap rates of single family properties is of little use. Also, cap rate is more of a valuation/risk metric rather than a performance metric therefore it's very relevant during a purchase/sale transaction (it is not or less relevant during the time you are holding the investment). For example, you would want to know the local market cap rate if you're a buyer trying to come up with an offer price for a multifamily/commercial property. Similarly, you would want to know the local market cap rate if you're a seller trying to come up with a listing price for a multifamily/commercial property.

If your objective is to measure the performance of your real estate portfolio periodically (i.e. annually, monthly, etc) there are many other metrics beside cap rate that are more useful such as cash on cash, yield, IRR, ROI.

Cheers... Immanuel

Ben Wilkins · Answer

Account Closed - is this a small multifamily? If it is that or SFR, take Cap Rate and set it aside for now.

Instead, tell us what the cash flow is after maintenance, CapEx, vacancies, taxes, P&I, management. Cash flow is what you should be targeting rather than Cap Rate. Some people aim for $150 per month per door, others aim lower.

That said, Cap Rate is all dependent on the local market. Some areas struggle to get 6% cap, while other areas have 10% cap rate properties all over the place. More info would need to be provided to help give a solid answer.