Cap rate for single family portfolio?

Question

I know cap rates are not used for single family houses, but is it appropriate to use for a portfolio of single family houses?

Chris Davidson · Answer

@Marco Anemone seems everyone loves cap rates these days. Sure you can use it but not sure how relevant it will be.

Chris Seveney · Answer

Do not use cap rates for single family properties. What if you go to sell one of those properties off, the end buyer is not basing pricing on cap rate they are basing it on comps.

Also as a reminder a cap rate is only a guide to do an initial analysis on a properties value. It is not the holy grail as it excludes cap ex costs. For example a new building with a 5% cap rate next to an old building with $1M in deferred maintenance at a 6% cap rate both bringing in the same NOI, which one would you rather buy?

Michael Penny · Answer

I understand what others are saying but I have the same question.  With multifamily (which I primarily invest in) if you are able to increase the income and/or decrease the expenses you impact the NOI and that is what is used to value the property -- NOI/CAP = Value.  So, I am wondering if I am able to do the same thing with a portfolio of single family will the value be based on comps or the NOI.  @Marco Anemone what did you find out?

Scott E. · Answer

My short answer is that I agree with @Chris Seveney, you should think about the appraised value of each SFR first when you are trying to value a portfolio of single family homes.

With that being said though, there might be some value in owning a bundle of the properties to you or a future investor that would "break the rules" of how you would traditionally value a SFR.

If you're buying 10 SFRs that are all in the same neighborhood for example, that's very convenient from a property management standpoint. Especially if you were going the short term rental route. And with that large of a presence in a neighborhood, you start to have more control over the comps too.

All that being said, if you're buying a bundle of properties, you need to look at it from every angle...

1. Comparison approach

2. Cost approach

3. Income approach (to include cap rate, cash-on-cash return, IRR)

Cap rate for single family portfolio?

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