Following Trend of SFR through CAP Rates

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I want to get my foot in the door into an untapped hot market but I just don’t know where or how to begin. Before diving, how do I determine what cap rates or areas should I scout for especially for a market that I’m not as familiar. Below are the two main questions I need answered before pursuing this lucrative endeavor.

What resources or data items should an I obtain to determine and calculate the current cap rate, the realistic cap and the trend of the market?

Is it possible that SFR (single-family rental) cap rates may have substantial differences between counties or subdivision within the city perimeter versus outer city perimeter, i.e Atlanta, Charlotte, Dallas or Tampa which have high competition, high value of homes sold but low rents?

Originally posted by @Thad Hayes :

I want to get my foot in the door into an untapped hot market but I just don’t know where or how to begin. Before diving, how do I determine what cap rates or areas should I scout for especially for a market that I’m not as familiar. Below are the two main questions I need answered before pursuing this lucrative endeavor.

What resources or data items should an I obtain to determine and calculate the current cap rate, the realistic cap and the trend of the market?

Is it possible that SFR (single-family rental) cap rates may have substantial differences between counties or subdivision within the city perimeter versus outer city perimeter, i.e Atlanta, Charlotte, Dallas or Tampa which have high competition, high value of homes sold but low rents?

 Of course.  a cap rate is essentially a PE ratio or a dividend yield with stocks.  Its snap shot in time of a ratio.

Cap rate is just the Net operating income/Current Market value.

The Current Maret value on a rental (or any investment) is valued on the current value of the discounted value of future dividends/earnings.  (very simplified version for those finance nerds who will take exception to my simplifications).  Ie add up the rent you expect to get for the next thousand years, and discount it by the time value of money.  (ie would you rather have $1000 today or $1000 in the future?)

The NOI is the current net operating income.

If you are in an area growing Really fast in population, rents and property values, then the price you will pay will look very expensive with incredibly low cap rates. because people will pay more now knowing that net operating income will grow very fast.

 If you are in an area where people are leaving in droves, that cap rate will all other things being equal be really low.  Because the future income will be flat to declining.

Think about the stock market, Tesla and Amazon are growth stocks, they will trade at a very high PE ratios.  Because investors expect that growth to eventually provide really high earnings.  A company like a utility will trade at a comparatively low PE ratio because the expectation is that the utility will grow future earnings slowly over time.  So those earnings streams are worth less in the future.

Cap rates are a good way to compare properties in similar areas because for the most part a metro area will trade similar to itself, ie its growing at the same pace.  But between areas of the country, you will see wildly different cap rates.  

The market telling you there are differences in future expected earnings.

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