What is the cap rate in your city?

71 Replies

Originally posted by @Alex Forest :
Originally posted by @John Erlanger:
Originally posted by @Steve Vaughan:
Originally posted by @John Erlanger:
Originally posted by @Steve Vaughan:

I am a buyer when the market cap for quality is closer to my ROE min of 7. I can still purchase at that, just not on the MLS.

Since cap rate is agnostic about financing and ROE is 100% dependent on financing and cap rate values property and ROE measures return how do these meeting at 7 have any actionable meaning?

Whether it's actionable or not for you doesn't matter to me. I don't recall asking your opinion.

As someone in the preservation phase of their financial journey all I said was any less than a 7% return I'll invest in things that require less work. Return meaning IRR, which factors in PP, which factors in cap rate as a return metric.

ROE is dependent on financing?  I don't see that, unless to argue that I could put financing on RE at less than 7% to optimize return.  But whatever,  I buy mostly with cash, but may begin to put financing on buildings as rates trend lower. 
 

Um, I didn't give an opinion.  I asked how that was actionable to YOU.  If you are just playing with meaningless calculations that is on you.  The market must be tanking for some if a simple question is met with such irritable replies!    

ROE is your return on equity. Do you know how to calculate that? If you put 99% down or 1% down your equity and financing will change the ROE. Am I wrong on that?

And how is that 7% cap rate a return?

Recently finished AI's Advanced Income Capitalization Course so anxious to use the learning.

Check this out,  https://www.biggerpockets.com/...

John, You come across as agitating and provocative starting with your first post. I'm actually interested in this question too, so would like to hear others input...perhaps I dont know enough about this residential commercial space, but so
far dont know how a cap rate wouldn't be one important metric to consider (among others), especially if speaking with a lender.

Just a 3rd party observation to the discussion. 

OK, point me to the agitated and provocative  parts.  I merely asked a couple of questions.  I was met with agitating and provocative replies.  I can point them out if needed.

If you are interested in this question may I ask why?  You can refer to my questions to the OP if you want.  Maybe I shouldn't have said he was a bad investor but I stand by that question.  If everyone that replies overpaid for their property then you can see how the information is useless and misleading.  Right?

As others mentioned a cap rate is not used to value SFR's and even in the commercial space novices calculate NOI incorrectly.

As far as lenders, they know what the market cap rates are.  Unless you are making a huge down payment they will not lend to you if you are overpaying.  Are we bros now?  Just tell me what you want.

A whole lot of people sharing there huge intellect. Id rather just answer the question, I'v been buying at about 10% in poughkeepsie, NY. MLS has it closer to 7%. All residential small multis. 2-10 unit range

Originally posted by @John Erlanger :
Originally posted by @Alex Forest:
Originally posted by @John Erlanger:
Originally posted by @Steve Vaughan:
Originally posted by @John Erlanger:
Originally posted by @Steve Vaughan:


I am a buyer when the market cap for quality is closer to my ROE min of 7. I can still purchase at that, just not on the MLS.

Since cap rate is agnostic about financing and ROE is 100% dependent on financing and cap rate values property and ROE measures return how do these meeting at 7 have any actionable meaning?  

Whether it's actionable or not for you doesn't matter to me. I don't recall asking your opinion.

As someone in the preservation phase of their financial journey all I said was any less than a 7% return I'll invest in things that require less work. Return meaning IRR, which factors in PP, which factors in cap rate as a return metric.

ROE is dependent on financing?  I don't see that, unless to argue that I could put financing on RE at less than 7% to optimize return.  But whatever,  I buy mostly with cash, but may begin to put financing on buildings as rates trend lower. 
 

Um, I didn't give an opinion.  I asked how that was actionable to YOU.  If you are just playing with meaningless calculations that is on you.  The market must be tanking for some if a simple question is met with such irritable replies!    

ROE is your return on equity.  Do you know how to calculate that?  If you put 99% down or 1% down your equity and financing will change the ROE.  Am I wrong on that?

And how is that 7% cap rate a return?

Recently finished AI's Advanced Income Capitalization Course so anxious to use the learning.

Check this out,  https://www.biggerpockets.com/...

John, You come across as agitating and provocative starting with your first post. I'm actually interested in this question too, so would like to hear others input...perhaps I dont know enough about this residential commercial space, but so
far dont know how a cap rate wouldn't be one important metric to consider (among others), especially if speaking with a lender.

Just a 3rd party observation to the discussion. 

OK, point me to the agitated and provocative  parts.  I merely asked a couple of questions.  I was met with agitating and provocative replies.  I can point them out if needed.

If you are interested in this question may I ask why?  You can refer to my questions to the OP if you want.  Maybe I shouldn't have said he was a bad investor but I stand by that question.  If everyone that replies overpaid for their property then you can see how the information is useless and misleading.  Right?

As others mentioned a cap rate is not used to value SFR's and even in the commercial space novices calculate NOI incorrectly.

As far as lenders, they know what the market cap rates are.  Unless you are making a huge down payment they will not lend to you if you are overpaying.  Are we bros now?  Just tell me what you want.

 Its  captured in your last paragraph. Lenders. If you're looking at a 5+ residential property, the lender will have a number in mind for cap rate. And so should the buyer. As simple as the metric is (or is not), it seems to hold weight.  For properties <5 units, agreed, it holds less importance.

As far as being bros, lol, maybe later but not yet sir.

Originally posted by @Alex Forest :
Originally posted by @John Erlanger:
Originally posted by @Alex Forest:
Originally posted by @John Erlanger:
Originally posted by @Steve Vaughan:
Originally posted by @John Erlanger:
Originally posted by @Steve Vaughan:


I am a buyer when the market cap for quality is closer to my ROE min of 7. I can still purchase at that, just not on the MLS.

Since cap rate is agnostic about financing and ROE is 100% dependent on financing and cap rate values property and ROE measures return how do these meeting at 7 have any actionable meaning?  

Whether it's actionable or not for you doesn't matter to me. I don't recall asking your opinion.

As someone in the preservation phase of their financial journey all I said was any less than a 7% return I'll invest in things that require less work. Return meaning IRR, which factors in PP, which factors in cap rate as a return metric.

ROE is dependent on financing?  I don't see that, unless to argue that I could put financing on RE at less than 7% to optimize return.  But whatever,  I buy mostly with cash, but may begin to put financing on buildings as rates trend lower. 
 

Um, I didn't give an opinion.  I asked how that was actionable to YOU.  If you are just playing with meaningless calculations that is on you.  The market must be tanking for some if a simple question is met with such irritable replies!    

ROE is your return on equity.  Do you know how to calculate that?  If you put 99% down or 1% down your equity and financing will change the ROE.  Am I wrong on that?

And how is that 7% cap rate a return?

Recently finished AI's Advanced Income Capitalization Course so anxious to use the learning.

Check this out,  https://www.biggerpockets.com/...

John, You come across as agitating and provocative starting with your first post. I'm actually interested in this question too, so would like to hear others input...perhaps I dont know enough about this residential commercial space, but so
far dont know how a cap rate wouldn't be one important metric to consider (among others), especially if speaking with a lender.

Just a 3rd party observation to the discussion. 

OK, point me to the agitated and provocative  parts.  I merely asked a couple of questions.  I was met with agitating and provocative replies.  I can point them out if needed.

If you are interested in this question may I ask why?  You can refer to my questions to the OP if you want.  Maybe I shouldn't have said he was a bad investor but I stand by that question.  If everyone that replies overpaid for their property then you can see how the information is useless and misleading.  Right?

As others mentioned a cap rate is not used to value SFR's and even in the commercial space novices calculate NOI incorrectly.

As far as lenders, they know what the market cap rates are.  Unless you are making a huge down payment they will not lend to you if you are overpaying.  Are we bros now?  Just tell me what you want.

 Its  captured in your last paragraph. Lenders. If you're looking at a 5+ residential property, the lender will have a number in mind for cap rate. And so should the buyer. As simple as the metric is (or is not), it seems to hold weight.  For properties <5 units, agreed, it holds less importance.

As far as being bros, lol, maybe later but not yet sir. 

Do you think lenders are looking on the BP threads to determine cap rates?  Cap rates come from closed sales.  If you are buying at an 8 cap in a 10 cap market you are an idiot.  Russel Brazil said he was buying at 3-6% cap rates in the same market.  What does that tell you?  That is an honest question.  

So you will get answers from 3% to 22% but there will be no supporting documentation so it means nothing.  Or does it, tell me!  I need to know.  

You know I can take that vote away, right.  NO pressure, just saying.

 

Originally posted by @Brian Zaug :

I'v been buying at about 10% in poughkeepsie, NY. MLS has it closer to 7%. All residential small multis. 2-10 unit range

I'm going o for 4 maybe. So the MLS "asking" prices are $14.28 per NOI dollar but you are paying $10. What are the MLS properties closing at? And if sellers are willing to accept $10 then why would anyone pay $14.28?

Originally posted by @John Erlanger :
Originally posted by @Steve Vaughan:
Originally posted by @John Erlanger:
Originally posted by @Steve Vaughan:
Originally posted by @John Erlanger:
Originally posted by @Steve Vaughan:

John, you clearly do not understand cap rates and are making assumptions and comments as if you do have an understanding, which is why the hostile responses. In its simplest form it is IRV . Income divided by return = value . in other words income if your NOI aka I ( ASSUMING NO DEBT ) IS 100,000 I DIVIDE THAT BY 7% AKA RETURN ( CAP RATE ) THAT WILL EQUAL V (VALUE ) . In the scenario above your value is $1,428,571 if the cap rate is lowered to 6% value becomes $1,666,667 and so forth . The scenarios above assume A properties thus the lower cap rates. cap rates are calculated with A+ tenants in the commercial world such as Walgreens / Starbucks Target etc... and they are in the 5's depending on lease terms etc... HOPE THIS CLARIFIES . Now onto the question in the QC market in Iowa cap rates are low 6's - in the Franklin , TN market they are in the 5's.

I am a buyer when the market cap for quality is closer to my ROE min of 7. I can still purchase at that, just not on the MLS.

Since cap rate is agnostic about financing and ROE is 100% dependent on financing and cap rate values property and ROE measures return how do these meeting at 7 have any actionable meaning?  

Whether it's actionable or not for you doesn't matter to me. I don't recall asking your opinion.

As someone in the preservation phase of their financial journey all I said was any less than a 7% return I'll invest in things that require less work. Return meaning IRR, which factors in PP, which factors in cap rate as a return metric.

ROE is dependent on financing?  I don't see that, unless to argue that I could put financing on RE at less than 7% to optimize return.  But whatever,  I buy mostly with cash, but may begin to put financing on buildings as rates trend lower. 
 

Um, I didn't give an opinion.  I asked how that was actionable to YOU.  If you are just playing with meaningless calculations that is on you.  The market must be tanking for some if a simple question is met with such irritable replies!    

ROE is your return on equity.  Do you know how to calculate that?  If you put 99% down or 1% down your equity and financing will change the ROE.  Am I wrong on that?

And how is that 7% cap rate a return?

Recently finished AI's Advanced Income Capitalization Course so anxious to use the learning.

Check this out,  https://www.biggerpockets.com/...

Thump your little textbook on someone else.  I don't want o be mentioned or tagged by you anymore. 

 

 As my Mentor always says, If someone is too smart to answer a simple question then they have given their best answer.  Bye, bye.

 

I would say SFR rental investments 6-8% for the most part but I have seen some from this past week push up to the 10.8% mark. On the commercial side 5+ doors it can push the 8-12% mark.

I would focus more on CoC ROI and use Cap rate as an indicator of strength/potential value. Cap rate isn't the end all be all but it is certainly something I look at when analyzing a deal.

Not sure if mentioned, but there are "cap rate surveys". CBRE puts one out every other quarter, but there are others as well. They address MF in most top tier cities. There does seem to be a "gentle" argument about the efficacy of using cap rates. My opinion is...of course this is a useful metric. Like it our not, it is industry standard and convention to assess profitability using cap rates. On a deal by deal basis, it is best to look at the entire pro forma but yeah. For SFH - cap rates are not really used but GRM is basically the same. Plus, with institutional investors showing appetite for large SFH rental portfolios and increasingly getting into the space...I bet you see more traditional looks at SFH properties (applied to the portfolio).

As far as my city...Colorado Springs...cap rates are too damn low <shakes fist at air>.  But don't worry, they have to stop at zero...right?

Originally posted by @Thomas Greer :

Not sure if mentioned, but there are "cap rate surveys". CBRE puts one out every other quarter, but there are others as well. They address MF in most top tier cities. There does seem to be a "gentle" argument about the efficacy of using cap rates. My opinion is...of course this is a useful metric. Like it our not, it is industry standard and convention to assess profitability using cap rates. On a deal by deal basis, it is best to look at the entire pro forma but yeah. For SFH - cap rates are not really used but GRM is basically the same. Plus, with institutional investors showing appetite for large SFH rental portfolios and increasingly getting into the space...I bet you see more traditional looks at SFH properties (applied to the portfolio).

As far as my city...Colorado Springs...cap rates are too damn low <shakes fist at air>.  But don't worry, they have to stop at zero...right?


Interesting discussion! Food for thought.

"Like it our not, it is industry standard and convention to assess profitability using cap rates."

If cap rate was a measure of profitability, then unprofitable investments (there are many out there) would have negative cap rate, wouldn't they?


"As far as my city...Colorado Springs...cap rates are too damn low <shakes fist at air>. But don't worry, they have to stop at zero...right?"

Well? Would they stop at zero? Are you saying there is no such thing as negative cap rate? :-)

Cheers... Immanuel

Hey @Immanuel Sibero ! There are a few ways to conceptualize cap rates - mathematically it is just (some version of) NOI or Value; economically it is the price point that matches supply and demand of capital to invest (more capital to invest -> values go up -> cap rates drive down to competition). I wouldn't consider a negative cap rate as a thing. I suppose you could have a goin-in cap on in-place rents that reflected a negative NOI...but that wouldn't really represent a market value for the asset. Capital would not be purchasing a negative return. What they would be buying is what they believe stabilized market NOI is.  At least that is the way I see it!   

Originally posted by @Immanuel Sibero :
Originally posted by @Thomas Greer:


Interesting discussion! Food for thought.

"Like it our not, it is industry standard and convention to assess profitability using cap rates."

If cap rate was a measure of profitability, then unprofitable investments (there are many out there) would have negative cap rate, wouldn't they?



Cheers... Immanuel

As a book smart thumper I think the point was that cap rates do not measure profitability. They measure value so there are no negative cap rates. A .001% cap rate would mean that investors have paid $1,000 for each dollar of NOI.

Updated 4 days ago

I meant .1%

@John Erlanger

I'm not sure if I understand, so I probably don't!  
If someone is buying at a 5 cap because they are anticipating a 10 cap, and they're going to rehab and force appreciation, or are in a strongly appreciating market due to rising rents, that's great. But I do not anticipate rising rents or appreciation (except on ones I am rehabbing but that's not all for them) so if I want a 10 cap, I buy one like that or pass on the deal. (Cap rate isn't my only factor, just using the 5 and 10 cap from your example.)

@Whit B.

To answer your original question on my last rentals:

I bought 2 mobile homes from one seller, both were on their own lot, so it was really 2 different properties, but one transaction.

Wasilla AK

$75,000 for both.

Property class was uh, mobile home... reasonable condition but if I had to class it probably B- or C+?

Cap Rate of 16.5% (not used much outside of commercial but I still like it on my spreadsheet)

ROI of 289% (I didn't put any money down at all, just some closing costs, so that number looks way higher than it would if I would've put money down) That's after accounting for 10% vacancy, 10% maintenance and 10% management, though I self manage and generally have less than 10% for vacancy and maintenance.

Single family homes around here do not cash flow well or have good cap rates if you pay market rates and get market rent. But four plexes can do ok and you can do well buying broken stuff.  Our immediate area (within 45 minutes or so) doesn't have a lot of multi family over 4 units though there are some.

Originally posted by :

I'm not sure if I understand, so I probably don't!  
If someone is buying at a 5 cap because they are anticipating a 10 cap, and they're going to rehab and force appreciation, or are in a strongly appreciating market due to rising rents, that's great. But I do not anticipate rising rents or appreciation (except on ones I am rehabbing but that's not all for them) so if I want a 10 cap, I buy one like that or pass on the deal. (Cap rate isn't my only factor, just using the 5 and 10 cap from your example.)

No one is buying at a 5% cap rate in anticipation of selling at a 10% cap rate. The formula is v=i/r. If I buy $20,000 NOI at 5% I paid $400,000! If investors will only buy at a 10% cap rate then my $20,000 NOI is only worth $200,000=$20,000/10%. I want to increase my NOI to $25,000 and sell at a 5% cap rate or lower. $500,000=$25,000/5%

 

Updated 4 days ago

Meant .1% cap rate which would be .001. Math is hard!

Originally posted by @John Erlanger :
Originally posted by @Immanuel Sibero:
Originally posted by @Thomas Greer:

Interesting discussion! Food for thought.

"Like it our not, it is industry standard and convention to assess profitability using cap rates."

If cap rate was a measure of profitability, then unprofitable investments (there are many out there) would have negative cap rate, wouldn't they?



Cheers... Immanuel

As a book smart thumper I think the point was that cap rates do not measure profitability. They measure value so there are no negative cap rates. A .001% cap rate would mean that investors have paid $1,000 for each dollar of NOI.

Yes that was exactly the point. Cap rate is not a performance measure nor is it a profitability measure (although this does not stop many investors and agents alike from using cap rate as such). The other point is there is no such thing as negative cap rate because there is no such thing as negative value. Even a negative NOI (i.e. effectively an NOL- net operating loss) coupled with a positive cap rate will NOT result in negative value.

Cheers... Immanuel

How can there not be a negative cap rate? If expenses exceed rental income on average, then you would be losing money even if you had bought the property all cash, and so your cap rate would be negative. Such a property might be exceedingly rare or nonexistent on the market, but it is at least theoretically possible.

Also, I believe the formula for cap rate is NOI/Capital* 100%, so if NOI is negative, cap rate should be negative by definition.

Originally posted by @Ayyub Omer :

How can there not be a negative cap rate? If expenses exceed rental income on average, then you would be losing money even if you had bought the property all cash, and so your cap rate would be negative. Such a property might be exceedingly rare or nonexistent on the market, but it is at least theoretically possible.

Also, I believe the formula for cap rate is NOI/Capital* 100%, so if NOI is negative, cap rate should be negative by definition.

NOI starts with PGI. What is that in your calculation?

Originally posted by @Thomas Greer :

Hey @Immanuel Sibero! There are a few ways to conceptualize cap rates - mathematically it is just (some version of) NOI or Value; economically it is the price point that matches supply and demand of capital to invest (more capital to invest -> values go up -> cap rates drive down to competition). I wouldn't consider a negative cap rate as a thing. I suppose you could have a goin-in cap on in-place rents that reflected a negative NOI...but that wouldn't really represent a market value for the asset. Capital would not be purchasing a negative return. What they would be buying is what they believe stabilized market NOI is.  At least that is the way I see it!   

IMO, there is really only one way to conceptualize cap rate ("Capitalization Rate") which is a mechanism to arrive at some value using some measure of income. This is why this mechanism is called the "income approach". The wise men before us had quite a few types of  "incomes" to choose from for this purpose (i.e. gross income, gross operating income, net operating income, net income). In their infinite wisdom, the wise men chose "net operating income" as a starting point in their quest to arrive at this elusive "value". They then said "hold my beer" and applied some "rate" to their chosen "net operating income" and like magic they arrived at a value. So they called this rate "Capitalization Rate" because well that's what the rate does, it capitalizes a dollar of income into X dollar of value. This is the only cap rate there is! I'm guessing in your terminology it is the one you conceptualize "economically".

As for the other cap rate conceptualization you mentioned (i.e. "mathematically" driven), this is the one that causes so much misconceptions with new investors. This is the one that many incorrectly use as a measure of performance. This is the one that can go negative when NOI turns into NOL, and all of a sudden you got yourself a negative cap rate in your hand. This cap rate SHOULD NOT be used for the simple reason that many confuse it with the cap rate mentioned above (i.e. in your terminology, the "economically" driven cap rate). Having said this, I do think there is some benefit in calculating NOI/Original Cost of a property. You can compare this metric across multiple years, you can also compare it across other similar properties. In many other investment sectors, this metric is called Operating Yield which is a true performance metric. In real estate, it is unfortunate that "mathematically" the formula for this Operating Yield is identical to the formula for cap rate! So people just use "cap rate" when they really mean "Operating Yield".

Cheers... Immanuel

Originally posted by @Immanuel Sibero :
Originally posted by @Thomas Greer:

Hey @Immanuel Sibero! There are a few ways to conceptualize cap rates - mathematically it is just (some version of) NOI or Value; economically it is the price point that matches supply and demand of capital to invest (more capital to invest -> values go up -> cap rates drive down to competition). I wouldn't consider a negative cap rate as a thing. I suppose you could have a goin-in cap on in-place rents that reflected a negative NOI...but that wouldn't really represent a market value for the asset. Capital would not be purchasing a negative return. What they would be buying is what they believe stabilized market NOI is.  At least that is the way I see it!   

IMO, there is really only one way to conceptualize cap rate ("Capitalization Rate") which is a mechanism to arrive at some value using some measure of income. This is why this mechanism is called the "income approach". The wise men before us had quite a few types of  "incomes" to choose from for this purpose (i.e. gross income, gross operating income, net operating income, net income). In their infinite wisdom, the wise men chose "net operating income" as a starting point in their quest to arrive at this elusive "value". They then said "hold my beer" and applied some "rate" to their chosen "net operating income" and like magic they arrived at a value. So they called this rate "Capitalization Rate" because well that's what the rate does, it capitalizes a dollar of income into X dollar of value. This is the only cap rate there is! I'm guessing in your terminology it is the one you conceptualize "economically".

As for the other cap rate conceptualization you mentioned (i.e. "mathematically" driven), this is the one that causes so much misconceptions with new investors. This is the one that many incorrectly use as a measure of performance. This is the one that can go negative when NOI turns into NOL, and all of a sudden you got yourself a negative cap rate in your hand. This cap rate SHOULD NOT be used for the simple reason that many confuse it with the cap rate mentioned above (i.e. in your terminology, the "economically" driven cap rate). Having said this, I do think there is some benefit in calculating NOI/Original Cost of a property. You can compare this metric across multiple years, you can also compare it across other similar properties. In many other investment sectors, this metric is called Operating Yield which is a true performance metric. In real estate, it is unfortunate that "mathematically" the formula for this Operating Yield is identical to the formula for cap rate! So people just use "cap rate" when they really mean "Operating Yield".

Cheers... Immanuel

Cool, @Thomas Greer stated, "

. I suppose you could have a goin-in cap on in-place rents that reflected a negative NOI.."

This is where a lot of investors fall off the rails. There is no in place cap rate. There is in place NOI. If you have a building 100% occupied and a building that is only 50% occupied and they have the same in place NOI you would not pay the same amount for each. You could potentially increase the 50% occupied property's NOI by double but the 100% occupied property has no upside!

@Steve Vaughan


 

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