Poll, what is your acceptable Cap rate?

16 Replies

Interested in hearing what different people have to say. I’m currently evaluating a triplex in Wilmington North Carolina, Gross rent multiplier is 8.1, net income after financing is solid, Cap Rate is at 6%. But that varies depending on the purchasing price. Asking you guys, when you were looking at a deal, what Cap Rate are you shooting for?

@Clint Harris

It's a triplex, you would be stuck on the sales comps of recently sold similar properties? You can calculate the cap rate of the triplex for whatever reason but that cap rate would have little relevance in determining the value of the triplex.

So when I look at a deal such as SFR, duplex, triplex, fourplex, I go straight to CoC or IRR or both. Cap rate is just not useful in this case. Gross rent multiplier is a variant of cap rate, essentially does the same thing... so it's about as useful as cap rate.

Cheers... Immanuel

Thanks, but I disagree. Here’s the scoop, there are no properties exactly like this one, its a neighborhood of townhomes, with three per building all individually owned. One person ended up with all three townhomes in one building from family members over the years, renovated it, and is now selling the building as a unit. There are no comps, but I can compare to each individual town house with the same floor plan. The owner is an airline pilot who is retiring, and wants to unload all of his properties because he no longer lives in the area.The cash on cash return is good because there are zero repairs to be made, and there are already three long-term renters in place. The reason the Cap rate is important is because if I want to refinance this property, it will need to be a commercial loan, which is dependent on the Cap rate. We currently own three other single-family homes which we owned free and clear, so it’s different with those. They are paid for and provide us with steady passive income, this one is different. There will be some equity, but no forced appreciation. If that equity is to be realized, it depends on the Cap rate.

@Clint Harris

Thanks for the clarification. The property sounds even more residential which is normally valued using sales comps but I'm not familiar with your market. So you absolutely can not refinance the property using conventional loans? Have you confirmed with a commercial lender that they will in fact value the property using income?

Cheers... Immanuel

@Clint Harris you can disagree all you want but it won’t matter. Assuming you want to finance this purchase, the bank is going to order an appraisal, and the appraiser is going to base it on recent sold comps.

If there aren’t many of those your value will probably be lower than you expect. Then whatever that appraisal is your bank will lend you 75-80 percent of that.

@Clint Harris are they deeded as one unit or are you buying three separate townhouses that are connected? Either way it will be appraised by a bank as residential. They will not use cap to put a value on the building.

@Clint Harris Why will any debt on the property have to come in the form of a commercial note?

Like @Jason DiClemente pointed out, how they are deeded will determine how the loans are underwritten. Based off of your description of one person ending up with the properties  over the years points toward each property having its own deed. What does the properties address say? Is it 123 Main Street with Units A, B, C or 123, 124, 125 Main Street? If I was a betting man I'd say this isn't a triplex, but three individual units being sold at the same time. 

Adding to @Immanuel Sibero 's point about Cap Rates not applying in this situation is the out sized affects of vacancy credit on your calculation. If one unit goes empty for two months you get a 5% decrease in Gross rents. That is too much variation to serve any use in loan generation. Not saying Cap Rate isn't useful in evaluating deals, but there is a reason 1-4 units valued using Comps or rebuild method of valuation. 

Finally getting to your question about acceptable Cap Rate: It depends on your goals and time horizon. Are you looking for a Core Asset to park money you won't need for awhile in to protect against inflation/market volatility? If so, 6% isn't bad. Do you want to build and grow a portfolio? In that is the case then 6% doesn't meet the mark in my opinion. What will the cash flow look like when/if you add debit servicing? You said the properties need little to no work done so that kind of rules out a value add play where you could suck up a weak cash flow until you cut expense/increased profits. What does the IRR look like over 5-10 years?

Exactly right Bill, these are 3 separate addresses, 200, 202, and 204, three separate townhomes that are connected. The seller wants to to sell them all as one, it’s a 3/2 and 2 2/2 town homes. They were renovated last year, in great shape, and right outside the gates of camp Lejeune, and they have had extremely high occupancy since being built in 2007 with word-of-mouth from the Marines having the next tenant lined up before one moves out. They are three separate addresses, to refinance them all would be three separate residential notes, but my banker, president of a local bank that does not sell their notes, can give me a better loan to value with lumping all three as a commercial loan. After looking at them today, the Cap X are very low because of the new renovation and everything really looks good with the exception of Federal Pacific panels in all three units which need to be replaced because of the recall. Besides that, it’s unique in that it’s not a traditional triplex, but after finding out that the tenants pay their own electric, water, sewer, garbage, and landscaping, the CR is much more attractive and the cash on cash return is good. I’m just trying to ask what Cap rates different people are looking for. If yours depends on where you are in your investing career and what your end goal is, that makes a lot of sense, would love to hear more and how your opinion has changed or grown

Forgot to mention, in terms of comps. There is one other building exactly the same across the street, its the only one like it in the area. One of the 2/2 units sold for 70 K in 2017, not renovated, bad roof, old unit, water heater, etc. The building that I’m looking at has all new floors, brand new architectural shingle roof, new units, new water heater’s, new countertops, etc, not much of a comp.

I normally do not look at these figures.  How much is the cash flow?  Can you rent out not leave them vacant?

Multiple family homes do not appreciate as much as SFHs.  How hard is it to unload vs SFHs?

It’s 3 single family townhomes being sold together, the rent is currently 800, 750, and 745. Rents will go up with new tenants, but for now will keep it the same. That’s 2295 per month. Cash flow is 733/month with cash on cash 18.2%. Seems pretty good to me, especially with very high occupancy rate and good tenants since it is across from camp Lejeune and rents consistently to young Marine families

I'm with @Immanuel Sibero , @Clint Harris . Cap Rate isn't really looked at for small multifamily. Banks won't give you a loan based on cap rate for small multi's. 2-4 units are treated just like Single Families and recent sales comps will be used to put a value on the SMF. What other criteria do you use to evaluate a potential acquisition?

My acceptable cap rate to sell my commercial apts in my 2 markets is 5% & 6%. I bought at 10 & 14% a while ago. No way I'd by at 6%. Can beat that in my sleep without the headaches of buildings and tenants.  Like they're fun or something. 

In the end, your are buying residential property, so cap doesn't matter other than to see it will take you over 15 yrs to get your money back, but thought I would answer your title question ;) 

@Clint Harris in that case, a conventional lender will issue 3 separate mortgages, each with its own appraisal. You could, possibly, try to find a portfolio lender to place them under 1 loan, but there are issues with that. What if you want to sell one? For the best rate and terms, you'll be looking at 3 separate loans on the building

@Clint Harris Thanks for explaining the circumstances. Unique situation. 

Portfolio Loans from a local bank do make things a little different but getting one loan on multiple properties can bring up some unique challenges. 

I in fact invest mainly in Condos/Townhomes in the Jacksonville area, so if you want to PM me or we could grab coffee and talk.

Good Luck

Hey Clint,

I like to shoot for double digit cap rates.  I weigh out the options and consider the fact that REIT can usually get me a hassle free 10-11%.  This doesn't take into consideration hot market holding value increases though.

-An Investment in Knowledge Pays the Best Interest- 

%6 CAP for a triplex in Wilmington is low. You want +10% minimum.

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