Grand Rapids, MI - Cap Rates

[Rob Gervais]

Hello everyone, I’ve been analyzing small 2-4 unit properties on the MLS for a couple of months in Grand Rapids. If I use 25% for expenses (5% each for vacancy, capex, R&M, and 10% for PM), most houses hover right around 3% cap rate or lower. Somehow, investors are still paying way over asking. Is it the metrics I’m using, or are people just setting themselves up for failure? Thank you!

[Mark Krier]

Hey @Rob Gervais -- I agree with the posters above that cap rate is probably not the BEST way to analyze a duplex, but it's also not a terrible way to do it either... I think you might have an error somewhere in how you're calculating your cap rates which is skewing your numbers. 

If you're using an expense rate of 25% like you said I'm not sure how you could be getting a 3% cap rate... You should be getting cap rates way higher than that. I'm an full-time Realtor & Investor in Grand Rapids in both SF & MF and most of the duplexes here have been going for somewhere close to the 1% rule. (btw, the 1% rule is:  $150k renting for $1,500/mo... or $120k duplexes renting for $1200, etc.)

So, if you find a duplex around the 1% rule, and if you're using a 25% expense rate, you should be getting a 9% cap. For example: 

- Let's say a $150k duplex brings in $1,500/mo in rent. 

- That's $18,000 per year in gross rents.  

- 25% in total expenses = $4,500

- That's $13,500 in NOI (Net Operating Income)

- Cap Rate =  $13,500 / $150,000 = 9%

Actively listed right now in Grand Rapids there's a duplex at 142 Carrier Street NE renting at $600/ea ($1,200 total) listed for $130,000, and there's another at 649 Easter Ave SE that should get $750/ea ($1,500 total) listed for $145k.

**Last thing I'll say is be careful because I think estimating 25% in total expenses is light. You have to analyze it deal by deal to know for certain, but if you're going to be using a rule of thumb I'd be more inclined to use something closer to 50% instead of 25% for my total expenses. If you do that, you'll be seeing 1% deals come in at a 6% cap rate.