How to evaluate 2-4 unit properties

[Ken Morris]

Okay BP, I first searched around for my question before asking but could not find any good clear answers to these questions:

1) Are we supposed to use cap rates ONLY with commercial properties? Or can cap rates be used with single family and 2-4 unit properties too? Because I was thinking cap rates are for commercial properties and GRM is for 2-4 units and that comparable sales CashFlow etc is for all but most specifically for single family properties.

2) If you are supposed to use cap rates for single family properties what are good ranges to buy at and what are good ranges to sell at (just generalized ranges I know it is dependent upon market and condition/class of the asset). But for a SFR what would you say these ranges are?

3) What are some good GRM ranges for multifamilies to buy at and to sell at? (Again generalize).

Thanks BP I can't wait to see what you cook up in the responses have been trying to clear this up in my head for awhile.

[Crystal Smith]

Originally posted by @Ken Morris:

Okay BP, I first searched around for my question before asking but could not find any good clear answers to these questions:

1) Are we supposed to use cap rates ONLY with commercial properties? Or can cap rates be used with single family and 2-4 unit properties too? Because I was thinking cap rates are for commercial properties and GRM is for 2-4 units and that comparable sales CashFlow etc is for all but most specifically for single family properties.

2) If you are supposed to use cap rates for single family properties what are good ranges to buy at and what are good ranges to sell at (just generalized ranges I know it is dependent upon market and condition/class of the asset). But for a SFR what would you say these ranges are?

3) What are some good GRM ranges for multifamilies to buy at and to sell at? (Again generalize).

Thanks BP I can't wait to see what you cook up in the responses have been trying to clear this up in my head for awhile.

It will be interesting to see the responses to your questions.  Here's my response:

1. 1. Cap rate = Net operating income / Current market value (Sales price) of the asset- We may use Cap rate in our business for a quick comparison of investment opportunities but it doesn't drive our final decisions.  The most important factor for our investments is ROI or CoC return. 
2. 2.  W/ respect to applying it to SFRs versus commercial, if you're going to purchase or market SFRs in bulk then maybe it make sense to use Cap rate to compare investments.  If you're paying cash for a SFR or a 2-4 unit then again using cap rate to compare opportunities makes sense.  But if you plan on leveraging then throw Cap rate out & look @ the real return on your cash.    
3. 3. We believe the right GRM depends on strategy.  We like the strategy of finding/purchasing property in an areas that supports a higher GRM than the property we're evaluating.  (e.g. Area support GRM of 6 & we try to purchase @ 3) This usually means the property is distressed hence the rents are low, property needs to be updated....  The objective:  Improve the property & drive up the rents.  Not rocket science.