Who has the best deal of a 2 bed unit?

Question

Immanuel Sibero · Answer

@Paul Camuto

I’m suggesting that cap rate is a terrible metric to analyze residential properties across markets because:

• Different markets have different fundamentals and different prevailing cap rates. The fact that residential properties are valued using sales comparables as opposed to cap rate comparables further skews the calculated property cap rates in different markets. Everything else being held constant, you would be comparing apples and oranges because a 12 CAP in Indy is not necessarily a better performing property than an 8 CAP in NJ.

• Cap rate is a metric calculated using ONE year’s worth of NOI. Unless you are investing one year at a time, wouldn’t you want to know how the property is expected to perform during your entire holding period?

IMO, a metric such as IRR is far superior and would address the above issues. I realize I'm not really answering your original question. Sorry about that, maybe this should be a different post :-) It's just that I'm faced with the same problem. I'm in the Dallas market that's overpriced and overheated where the deals are not penciling out so I started looking in other markets but cap rates are nowhere in my worksheets.

Cheers… Immanuel

Immanuel Sibero · Answer

@Paul Camuto

I'll take a stab. There has been no replies maybe because cap rates are irrelevant in residential properties. There is no correlation between cap rates and price in residential properties.

Cheers... Immanuel

Ron Flatt · Answer

Nope, Not a turnkey, I made my own turnkey.  I bought, fixed it and now I rented it.

Jinyu Shao · Answer

@Immanuel Sibero Thanks for the explanation. Now I definitely want to look more into using IRR on my investments!

@Ron Flatt That sounds like a pretty goo deal. Is it a turn key property? How did you find it in the first place?

Best,

Jinyu

Ron Flatt · Answer

I love my little 2/1 in Waco.  It is a solid C property.  Same renter for 2+ years, with hopes of buying it.

35K purchase, 15K remodel.  Rent $725 per month

Immanuel Sibero · Answer

@Jinyu Shao

I use IRR which is a metric that's designed to measure performance/profitability. A better performing property is one with higher IRR. But then again IRR only measures RETURN of an investment, it doesn't tell you anything about the RISK associated with the investment. So an investment with the highest IRR is not necessarily the best one if the investment carries higher risks.

Cap rate, on the other hand, is not designed to measure performance/profitability, hence a poor metric at that. Cap rate is more of a valuation metric.

For a 20% CoC in Waco, TX I would question the quality and the demographics of the area (i.e. the RISK part of the equation as referred to above).

Cheers... Immanuel

Jinyu Shao · Answer

@Paul Camuto I recently took a trip to Trenton and from what I see, most of the neighborhoods are C, some C approaching B. The areas bordering Trenton and Hamilton might be of interest to you. Hope this helps!

Jinyu Shao · Answer

@Immanuel Sibero Which metric/metrics do you use to evaluate whether a property is worth the investment? Also, what would you consider consider to be a better performing property?

I live in NYC but am looking to invest out of state. A few places I've looked at (not physically but online) are Waco and Trenton. Waco seems like a good area based on my calculation. I use Cash on Cash return. Some properties comes out to be in the 20% range which was shocking to me! Trenton has similar numbers but slightly less profitable.

Who has the best deal of a 2 bed unit?

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