All Forum Posts by: Curtis Waters

I recommend Realty Inspection Services of Mt. Pleasant NC - I use them for my clients, personal home, and investment properties.  

harrymarshlaw.com

Mention my name please

Bob,

From Wikipedia.org - Capitalization rate (or “Cap Rate”) is a real estate valuation measure used to compare different real estate investments. Although there are many variations, a cap rate is often calculated as the ratio between the net operating income produced by an asset and the original capital cost (the price paid to buy the asset) or alternatively its current market value. 

If I purchase a property for $100K and the CAP rate is 9% - my annual net operating income is $9000.

If I purchase a property for $100K and the CAP rate is 4% - my annual net operating income is $4000.

Cap rate is not a return - but a reflection of your return vs your capital cost.

1. When calculating CAP rate or Cash-on-Cash return, you look at an annual basis.

2.  You will find that increasing the purchase price doesn't result in an increase in rental rates.  Most residential properties start diverging from profitability at some point.  If you could reduce the price and keep the rent the same - your return increases.

3. Add whatever operating expenses you want - CapEx, property management, etc. I didn't include as many investors feel that a new home would have no CapEx for a while (not necessarily true). You may want to property manage yourself. Whatever operating expenses you add - these will all result in a lower return.

4. Yes- at a 9% CAP rate I would pay $133K. On a home that had been properly rehabbed, this should be a sound financial investment.

Considering the fact that you are investing in real estate with unknowns - tenants, unforseen maintenance issues, insurance claims, etc - to me - a 4-5% return doesn't seem like an adequate return on my investment (risk vs reward).

CAP rates are used on investment properties as a guide to determine your return on your investment. If you paid $250,000 on an SC property that rented for $1700/mo:

Annual Income                                      $20,500

Taxes                                                         3,600 (would be about $1,200 with owner occupied)

Insurance                                                      800

Maintenance allocation                              2,000

Vacancy allocation                                     2,050

Net operating Income                               12,050

CAP Rate 4.8%

On most rentals in the Charlotte area I look at a minimum of an 8-9% CAP rate.

@Ron T - you will find that buying homes from builders will get you a new product - but the CAP rates seem to be about 4% and CoC is likely under 10%. A new build doesn't necessarily mean no problems.

BB&T Commercial will do this loan, as well as Lima One Capital's Rental30 program.

Austin,

This is a quite low monthly return.  If a tenant moves out your 3% vacancy projection means you have 1.5 weeks to turn the unit and get a new tenant.  7% property management is low as well.  Keep in mind with property management - you aren't looking for the low fee - you are looking for a property manager who can maximize your rents and keep expenses low.  

The numbers for Condos or Townhomes are always skewed by the monthly HOA fees. If you had a SFH with these numbers this deal would certainly make sense.

I recommend looking at deals where your CoC is at least 15% (the value of leverage). Also - on condos or townhomes, an increase in the monthly HOA fees or a special assessment might wipe out your return.

I caution you against counting on appreciation.  While the Charlotte market is strong, marketability on many condos will be to other investors once the owner count is primarily investors.  Don't forget 2008/2009 when values dropped nationwide - this could happen again, even in Charlotte.

 Curtis

I recommend a focus on SFH rental properties under 100k that rent for $200 over the break even price ($100k property would rent for at least $1200/mo,$80k property renting for at least $1000/Mo). You should realize a 9%+ CAP rate or a 20%+ cash-on-cash return

I would caution you to consider special assessments and HOA dues increases on condos.

Consider a commercial lender - they work with investors who hold properties in an LLC. If you want to buy multi-family that is non-standard - they aren't scared to fund these - such as 2 or more properties on one parcel. Traditional lenders who use Fannie Mae guidelines won't fund these.