Should I be using the cap rate to analyze student rentals? Each property is different because they are usually converted houses. Some are one big house with 3-6 bedrooms. Others have been split into separate units with their own kitchens and utility meters. Given the different structure of each unit I was thinking it might be better to use the cap rate. My vacancy % is low because 99% of student housing has been booked for next school year. The signing period opens in September for the following year. This particular property is rented through 2020 so I know what my income will be for the next 2 years.
Am I missing anything? Does this look like an ok deal?
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@Michele G. , cap rate is more of a metric to compare and value commercial properties. It is not a good measure of determining whether or not a particular deal is good, especially small rentals, except as a potential hurdle for further analysis.
On paper your deal looks OK. I would do a lot more due diligence before I pulled the trigger, though. I would also personally want a much higher return for my capital than 7-8%. There are a lot easier, more passive, ways to get that.
Thanks for your advice. Should I stick to using COC & monthly cash flow as my metric for whether to investigate a potential property further? I can’t compare properties on a $ per door metric since some have 1 door and 6 beds and others have 3 doors and 3 beds.
How much should I allot for vacancy in a high demand student rental market that rents units out a year in advance? I used 3%. The unit is rented for the next 2 years. 1 year leases are the norm so the students pay even if they leave for the summer. There is only a 2 week period properties are empty to allow for turnover repairs & cleaning.
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