Seattle 2-4 unit CAP rates? Really?

[Christopher J.]

I would like to buy my first income property...I'm focusing on 2-4 unit residential in Seattle. I'm reading tons (just found this site via Frank Gallinelli's books and it's awesome!), talking to friends who invest in real estate and analyzing the market data. The market data has me totally discouraged.

In the last 2 months, about 24 properties of this type have sold in the area of Seattle I'm focused on. The average CAP rate is 4.2% based on NOI = 60% of gross rents (I know every property is different but I'm told this is a decent rule of thumb). A typical example is triplex with $35,500 in gross annual rent for $500,000....

35,000 * .60 / 500,000 = 4.2%

I'm calculating that I'll need to put down 40% on a deal like this to achieve a bank required debt coverage ratio of 1.2!! With NOI growth of 2.5%/year my IRR is like 5-6%. I can play around with the numbers a bit but it doesn't get much better!!

Am I analyzing this wrong or am I just in a bad market to buy income properties? I don't want to be greedy but I want to earn more than 5-6% here!