Are all cap rates the same?

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Andrew Syrios · Answer

Cap rates are used to boil different apartments or commercial properties to a comparable number; namely how much net income do they bring in versus the cost of the property.

But they don't account for risk, hassle or potential upside. Would you rather have a 10% return on your money in a dilapidated war zone or in a trendy area that continues to improve? The worse the area, the higher cap rate I would demand. So no, cap rates are not all the same.

Russell Brazil · Answer

To piggyback on Andrews point, cap rates are a reflection of the markets view of the risk in the underlying asset and market.  Higher risk properties and markets, like the war zones will have higher cap rates. Complete dumps that are falling apart will have high cap rates.

Lower risk markets and properties will in turn have lower cap rates.  Areas of high demand, where values and rents rise will have lower cap rates.

Andrew Syrios · Answer

It's a bit of a subjective thing of course, but I would say that broadly speaking, C class is a working class neighborhood and D class is basically the ghetto. For example, C class would have a crime level above the national average whereas D class will usually have a crime rate more than double the national average.

Logan Reinard · Answer

@Russell Brazil @Andrew Syrios great illustrations. From what I’ve found, a lot of less desirable areas produce a better cap rate but may need a bit more fixes down the road and would also not be gaining any value when it’s time to sell unless the unexpected happened and the area turned around. Would you agree with that?

Do either of you invest in less desirable areas? If so what things to watch out for. If not why not?

Charles Carillo · Answer

@Logan Reinard

No, cap rates different by the location, property type, property size, prior sale comps, lease terms of current tenants, property class, creditworthiness of tenants, age of the property, population growth, job growth, inventory of like properties etc.

Logan Reinard · Answer

@Andrew Syrios what do you find the major difference between c class and d class?

Logan Reinard · Answer

@Jaysen Medhurst i actually have never heard of a 5th meter but yeah... someone has to pay for landscape lights etc

Andrew Syrios · Answer

I am definitely hesitant toward D class, but I would buy a C class. Our whole strategy is basically C to B minus with a few C minuses and B's thrown in for good measure. But for a C class property, I would definitely want a better cap rate.

Jaysen Medhurst · Answer

@Logan Reinard, if there’s a 5th meter, you have house electric that’s paid by the landlord.

In terms of snow removal, it will vary with the year and size of driveway. I think the best approach is too find a landscaper who also plows. Get a monthly price to do everything in the yard and take care of the snow.

Logan Reinard · Answer

@Jaysen Medhurst

• 8% for Vacancy is probably fine, unless this is a local average.

• You're forgetting CapEx. 15% combined with repairs is usually good.

YOU ARE RIGHT. I DID FORGET THAT.

• Any house electric? For hallways, etc.

WHAT DO YOU MEAN BY HOUSE ELECTRIC?

• What about lawn care and snow removal?

GRASS IS EASY. ANY TIPS ON SNOW REMOVAL COST?

• The listing says water & trash is $210/month, but your pro forma only add up to $158.

GOOD CATCH. MAKING SURE YOU WERE PAYING ATTENTION HAHA

• I'd allocate more for initial repairs, considering the garage needs work.

Yeah. That garage looks huge too

Are all cap rates the same?

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