Cap Rate/CoC Return

[Rob Scarborough]

I'm fairly new, but looking at a possible 4-plex with a partner.  In an all cash purchase/reno, shouldn't the Cap Rate and Cash on Cash return be the same?

The only time CoC should be different is when there is a loan...correct?

Thanks!

Rob

[Ned Carey]

To answer your original question. Cap rate is the ConC return on investment if you pay all cash.  This is basically what everyone else has said. 

I can not disagree more strongly with @Account Closed   Of course you can use cap rate to evaluate a 4 unit or less building. While appraisers and banks may not use cap rate and prefer the comparable sales approach there is no rational reason for doing so. The cutoff between calling a 5 unit+ building "commercial" as to distinguish it from a 1-4 unit is an arbitrary distinction and has no place in evaluating the investment for your own purposes.

Because appraisers and banks use the comparable sales approach for 1-4 units then it becomes important only to the degree it helps or hinders your ability to get financing.

Maybe Bob and I agree after all

What Bob is describing is how to find a market value for a property.  His comments make more sense in that context. 

However when I evaluate a property or a deal I don't care what the market says it is worth, I only care what it is worth to me! I want to know the cap rate. Of course cap rate is only one small part of my evaluation. Cash on Cash is important, Debt coverage ratio, condition of property, neighborhood, rents relative to market, IRR, LTV, GRM, etc.

The "Market" is not a very good judge or value. If it was we wouldn't have market cycles. In 2006-2007 when the risk of the market was high. The "market" was willing to pay high prices.  In 2009-2010 when prices had plunged the risk of the market had greatly decreased . Yet the "Market" greatly undervalued properties in that period.