High Cap Rate but Negative Cash flow possible?

[Franky Aikens]

Hi BP,

I'm a REI newbie. Working out the numbers for a buy and hold opportunity in Philadelphia, PA. My calculations are netting out with a high cap rate but a small negative cashflow. Is this possible? I'm being conservative with operating expenses by doubling my estimation and coming out in the red by under 100 bucks.

[Immanuel Sibero]

@Franky Aikens

It would help a lot to see the detail of your calculation. Let's look at some definitions in general terms:

Cap rate = NOI/Purchase(Value)

Cash flow = NOI - Debt payments - Cap expenditures

So according to the formulas above, a high cap rate with low or negative cash flow can result from high NOI and also high debt payments and high capital expenditures. So it's likely that you're being very conservative with your capital expenditures or, if the project is financed, high interest rate and shorter amortization. So yes it is possible to have high cap rate and negative cash flow.

@Franco Li

How can you tell if there is property appreciation? If anything, in areas where there is a lot of property appreciation the cap rate is excessively compressed (i.e. CA, NY). Besides, property appreciation is not a factor in the calculation of cap rate nor cash flow.

Immanuel