CAP Rates and Your Expectation by Property Type..?

[Nir]

Dear Investors,

Is it true that ON AVERAGE the more units the property has the higher the CAP rate? i.e. duplex has a better CAP rate than single family, triplex better than duplex, 12-plex higher CAP than 6-plex etc.?

Also, if (like me) you too are an investor who gives high weight to CAP Rate when making a buying decision, what is the minimum CAP you expect from a duplex, triplex and 6-plex? 7%? 8%?, 10%??

THANKS,
Neil

 

[housingrental]

Return to size - Yes, but exceptions to every rule
Cap - Assuming you`re not modifying to increase I`d consider at minimum of low/mid 7% cap rate for an investment property.

QUOTE (investmart @ Jun 3 2008, 12:03 AM) Dear Investors,

Is it true that ON AVERAGE the more units the property has the higher the CAP rate? i.e. duplex has a better CAP rate than single family, triplex better than duplex, 12-plex higher CAP than 6-plex etc.?

Also, if (like me) you too are an investor who gives high weight to CAP Rate when making a buying decision, what is the minimum CAP you expect from a duplex, triplex and 6-plex? 7%? 8%?, 10%??

THANKS,
Neil

 

[Nir]

Thanks Adam!

 

[lanedry77]

Hi Neil,

Our last purchase was a bungalow with a basement suite and double garage in Calgary, and it came in at 9.18%. Our JV on that property is quite happy.

Our second last purchase, also a bungalow with a basement suite (no garage) in Calgary landed at 7.94% and still cash flows quite nicely.

I would agree with Adam that 7% would be a bare minimum, but given the real estate market right now, I`d shoot higher - 8% or 9% is certainly attainable.

I can`t add any value to the conversation about anything bigger than a two suite bungalow, but I`ve heard that the cap rates for larger building sometimes aren`t better, but the real savings is in things like one boiler and lower property taxes per unit.

Perhaps Thomas or other multi-family gurus might jump in and add more detail.


David.

 

[Nir]

Hi David,

9.18% CAP is Amazing!

However, was it calculated based on ACTUAL COSTS ONLY or did you add an estimated % of the rent to the expenses to calculate the CAP?
For example, I add around 15% of the rent to my actual expenses for things like Property management, Vacancy allowance and Repairs & Maintenance, in order to calculate the CAP Rate, although I`m managing them myself.

I like the idea of 7-8% MINIMUM CAP, it`s a little more difficult in my case (but YES, possible) as I`m using really moderate figures, to be on the safe side, like double the actual vacancy rate in the neighborhood etc., for the purpose of estimating the CAP.

You are correct, Mr. Thomas Beyer provided GREAT information on the topic, especially multi-plexes, in previous postings.

Regards,
Neil

 

[lanedry77]

QUOTE (investmart @ Jun 4 2008, 09:38 AM) Hi David,9.18% CAP is Amazing!

However, was it calculated based on ACTUAL COSTS ONLY or did you add an estimated % of the rent to the expenses to calculate the CAP?
For example, I add around 15% of the rent to my actual expenses for things like Property management, Vacancy allowance and Repairs & Maintenance, in order to calculate the CAP Rate, although I`m managing them myself.

I like the idea of 7-8% MINIMUM CAP, it`s a little more difficult in my case (but YES, possible) as I`m using really moderate figures, to be on the safe side, like double the actual vacancy rate in the neighborhood etc., for the purpose of estimating the CAP.

You are correct, Mr. Thomas Beyer provided GREAT information on the topic, especially multi-plexes, in previous postings.

Regards,
Neil
Hi Neil,

We use the following hard monthly costs that are included in that cap rate;

10% of Gross Monthly Rent as property management costs.
5% of GMR as maintenance costs.
5% of GMR as vacancy costs.

Of course, the maintenance and vacancy funds just build-up in that properties account until those funds are needed, so the expenses that are actually paid each month vary, but those are the budgeted amounts and are `paid` before the cap rate was calculated.

We may bump the vacancy rate in the future (to 6% maybe) depending on what happens in the city. For now, it gives a large enough cushion from the actual vacancy rate, so we`re still comfortable with 5.0%.

We manage the properties internally and pay ourselves for it. That costs *does* get paid each month (our time is valuable, and not given away for free), but our JV partners are happy with paying us for that cost since (1) it has to get paid anyhow, and (2) we do a much better job than most of the managers out there (REIN-based managers excluded).


Yes, it was a good purchase.

David.

 

[Nir]

Thanks for sharing David,

Truly AMAZING results then, both the 9.18% and 7.94% CAPs.

Cheers,
Neil

 

[Thomas Beyer]

anything over a 7% CAP rate in a decent economy like BC or SK or TX or AB is good value .. a 9% CAP is OUTSTANDING and hard to get or even harder to repeat ..



10% for a flat economy like Ontario (Thunderbay comes to mind) and 15 to 20% for a declinign one like Windsor ..



BUT: you must look at POTENTIAL CAP rates too .. i.e. what can this property look like in one to two years given likely rent increases through management changes or improvements ! That is where the true value is created : bringing a building (or 5) that is worth $2.0M to $3.0M .. usually through improvements in the rent roll through ingenuity, improvements and hard work.



We look usually at PRICE PER DOOR ONLY for a given sub-marekt we are targetting, say SK or TX .. CAP rate follows after a year or so after we've done upgrades !



This is a good read also: http://myreinspace.com/public_forums/Real_Estate_Discussion/62-10711-Equity_is_not_the_only_way_to_make_money_in_real_estate.html .. as even in flat markets a decent going in CAP rate can yield tremendous cash-on-cash ROIs !!

 

[Nir]

Thanks Thomas,

YES, the link you provided is the one I referred to. I learned SO MUCH just from this posting of yours alone!

You mentioned "45-50% is an accurate "rule of thumb" figure .. or $3200 to $3400 per year in expenses".

I wanted to ask if you use this estimate (~$3300) for 1 bedroom apt, bachelor or 2 bedroom? I`m assuming your estimate for 1 bdr expense is different than bachelor which is different than 2-bdr?

Also, wanted to ask if you believe bachelors in general are problematic due to higher vacancy rates. I`m considering a 4-plex but 3 of the 4 units are bachelors the forth is 1-bdr so really not sure about it(?) Also, there is no furnace there! However, perhaps no furnace means a potential increase in CAP (if a Furnace can be installed there after the purchase) if I understand your logic correctly about increasing CAPs.

Lastly, what is your preference regarding apartment size - do you prefer bachelor, 1 bdr, 2 bdr or a mix of different apartment sizes in multi-family/apartment buildings you consider/purchased?

Thanks & Regards,
Neil

 

[Thomas Beyer]

QUOTE (investmart @ Jun 6 2008, 11:02 PM) Thanks Thomas,

YES, the link you provided is the one I referred to. I learned SO MUCH just from this posting of yours alone!

You mentioned "45-50% is an accurate "rule of thumb" figure .. or $3200 to $3400 per year in expenses".

I wanted to ask if you use this estimate (~$3300) for 1 bedroom apt, bachelor or 2 bedroom? I`m assuming your estimate for 1 bdr expense is different than bachelor which is different than 2-bdr?

Also, wanted to ask if you believe bachelors in general are problematic due to higher vacancy rates. I`m considering a 4-plex but 3 of the 4 units are bachelors the forth is 1-bdr so really not sure about it(?) Also, there is no furnace there! However, perhaps no furnace means a potential increase in CAP (if a Furnace can be installed there after the purchase) if I understand your logic correctly about increasing CAPs.

Lastly, what is your preference regarding apartment size - do you prefer bachelor, 1 bdr, 2 bdr or a mix of different apartment sizes in multi-family/apartment buildings you consider/purchased?

Thanks & Regards,
Neil

in hindsight the ONE change I would make in my investment career is to buy more 2BRs .. as we have quite a few 1BRs and bachelors .. so yes, costs are a little lower (less bathroom flushes, less showers, less people, less space thus less heat and less garbage per unit) .. and yes, less turnover .. but the prices are also a LOT higher ! .. so the question is how much real estate can you buy with a $ invested .. and I erred on the side of more real estate (regardless of size/type of bedroom layout) .. but yes, IF you can buy more 2BRs .. but you will buy less units with the same $ amount !

 

[Nir]

Hi Thomas,

You actually mentioned a LOT of advantages to 1-bdr and bachelors. The ONLY advantage mentioned to 2-bdr, if I`m reading this right, is less turnover.

So is turnover the only/main reason you prefer 2-bedroom or with all the advantages mentioned to bachelors/1-bdr (again.. if I`m reading your response right), you still prefer 1-bdr/bachelors?

Thanks,
Neil

 

[Thomas Beyer]

QUOTE (investmart @ Jun 9 2008, 09:50 AM) Hi Thomas,

You actually mentioned a LOT of advantages to 1-bdr and bachelors. The ONLY advantage mentioned to 2-bdr, if I`m reading this right, is less turnover.

So is turnover the only/main reason you prefer 2-bedroom or with all the advantages mentioned to bachelors/1-bdr (again.. if I`m reading your response right), you still prefer 1-bdr/bachelors?

Thanks,
Neil

as with many things in life "it depends ..." so not an easy answer .. yes I prefer 2BR but as I said they cost more (or alternatively you get less units for the same cash invested) .. so do I prefer a Lexus with leather seats and a navigation system over a Volvo with cloth seats and no navigation ? yes, but I am also prepared to pay more ..

 

[Nir]

Thank You Thomas.

You are correct, it`s not an easy one. I guess I`m just having hard time deciding whether to purchase a duplex with lower CAP (7%) but less work (one 1-bdr and one 2-bdr) or a 4-plex with higher CAP (10%) and more work (three bachelors and one 1-bdr).

The 4 plex and duplex cost the same by the way - below 200K!

I tend to go for the 4-plex with higher CAP..

Regards,
Neil