How Do I Find What's the Cap Rate for my Area? (NY)

[Roy Assaf]

I have a question for the buy and hold investors,

We decided to start looking for a small multi-family in the NY area (Bronx, Brooklyn, and Westchester) to keep as a rental property. We are studying every day about it and we are working on our budget these days as far as the down payment and a loan. 

My question is how we can find out what's an average cap rate? I know that it changes from an area to an area and probably from a neighborhood to a neighborhood, but is there a formula, resources to look at, etc. 

Any help will be great, thanks!

[Che Chiu Wong]

@Roy Assaf To keep it short, you need to find out the 1) income, 2) expenses and 3) how much you will buy at.  It is Yearly(Income - Expense) / Purchase Price.

1) Income - In the old days, you will need to go ask some agents and/or go to MLS (Multiple Listing Service, the "database" for agents to look for rental listings) as to how much the rent your neighborhood is. Now Craigslist is your friend. (Especially in large cities like New York City)

2) Expense - A lot of estimates.  Work out the numbers as examples and you should be able to spot patterns.  Real Estate Tax, Estimated Vacancy, Maintenance, Property Management Fee, Insurance are your bigger items.  Then, sum up all the expenses and compare with the total rental income.  That number will be your Expense Ratio.  Make a note of that number.  Work through a few (or dozens) listings and you should see what the general number is.

For example, in my area the expense ratio is roughly at 50%-55% (meaning for every $2, $1 - $1.1 goes to expenses, I left with $0.9 to $1 in my pocket).  Different property will have different ratios, but in a given neighborhood, you will be surprised how consistent this ratio is across properties. 

3) How much you buy at - look for sold listings in your area.  Again, in large cities the prices are very transparent and by looking through sold listings (don't trust Zestimates, but Zillow sold comps are good), you should be able to get a feel of the prices in no time.

Shameless plug here.  But I wrote an article as to how to calculate the cap rate.  Much more detail than above. 

How to Calculate Cap Rate