Cap rate chat for Worcester MA?

Question

I am constantly hearing about cap rates when I look at larger commercial properties, but I never hear it mentioned when touring buildings under 4 units. I would be interested in hearing what investors (or yourself) are looking for when it comes to cap rate in the Worcester market. I am speaking strictly NOI / PP. No mortgage or tax expenses.

Would it be greedy of me ask for a 5 cap on a 100+ year old 2 family building?

I am mostly curious as to what other investors would be satisfied with

Would it be greedy of me ask for a 5 cap on a 100+ year old 2 family building?

I am mostly curious as to what other investors would be satisfied with

Jonathan Bombaci · Answer

@Paul Ireland what’s your goal for buying  2 -4 family in Worcester? If you are buying it as a househack or to create cashflow then I would recommend forgetting about CAP rate until you move up into the larger commercial real estate world. You should be using a calculator and running your numbers. Focus on the cash on cash returns. You should be able to find 3-4 family properties in Worcester county that could produce 10% cash on cash returns within 12 months. I know this because we’re in the process of buying a bunch of properties with this investment criteria ourselves, some right off MLS.

CAP rate is a great way to compare stabilized commercial properties but honestly I just use it as a reference point like the 1% rule or 50% rule. The only number that matter to me is the cash on cash return and running my 12 month proforma to see if we can take a underperforming asset and turn it into something that will meet our investment criteria. If the listing agent tells me that this is a "great X Cap" I say awesome please send me the financials. Then I run my own numbers and look at my cash on cash return. A "10 Cap" with no management fee or reserve allowance on the financials might only be a 8% cash on cash return when I run MY numbers.

The reason why CAP rate isn’t talked about in the small multfamily properties is because it’s not a meaningful metric on that real estate product at the end of the day the CAP rate at face value is a dangerous thing. Always run your numbers your way and set a strict investment criteria for yourself.

i hope this helps. best,

Jon

Jason Regan · Answer

@Paul Ireland  I am finding out in Worcester County (except maybe Worcester itself @Brian J Allen knows that city better then I) it is easy to get a CAP rate.  I actually have a 3 Family in Fitchburg listing that's much higher then that right now.  On another note CAP rate is a good way to look at properties to see which one out of the list will be a better buy.  There are many other metrics that matter too though.  As an investor with a smaller portfolio I really put a lot of weight on Cash on Cash Return.  This way I can recycle my money faster to build my portfolio.

Brian J Allen · Answer

@Paul Ireland you should be able to get over a 5 cap in great locations in worcester and maybe a 7 cap in lesser locations.  The key to driving up the cap rate and making more $ is to improve the property or increase the rents. What is tough is that there are a lot of older Terrible places out there and lots of places with low rents.  Key is to make sure you don’t get a place with both low rents and a bad property.

Tristan Scott Zell · Answer

Usually cap rats are used for commercial buildings 5 units and above. It’s a investor sentiment metric used to determine what an investor will go for a certain income stream. On a two family a cap rate won’t mean anything because it’s based off comps at not it’s NOI.

Cap rate chat for Worcester MA?

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