For SFH deal analysis - which is important - Cash Flow or CapRate

[Parag D.]

I am trying to figure out what should drive my next real estate investment decision - do I give more importance to cash flow or Cap Rate? Below are the numbers of my first real estate investment. Looking back, should I have done this deal?

Bought brand new single family house in a new subdivision - 2400 sq ft, $350,000 price

Added a concrete pad/patio in backyard for $2500, radon gas mitigation system for $1500 - total improvements $4000

Rented out for two years, $2425 per month rent.

Operating expenses includes property tax, property insurance, HOA, 3% of rent as vacancy rate, 3% of rent as maintenance reserve, interest on mortgage.

monthly cashflow year 1: $2200

monthly cashflow year 2: $1700 (as property tax of $500 assessed after year 1)

Cash on Cash returns:

year 1: $21.29%

year 2: $13.15%

Cap Rate:

year 1: 7.55%

year 2: 5.7%

I read that average cap rate should be between 8% and 10% for a reasonably good deal. Looking back, would this have been a good deal?

Thanks

Parag

[Greg Scott]

Ignore Cap Rate in single family.

Cap Rate is a metric used for commercial property.  Commercial property is valued based on the income approach.  The higher the income the higher the valuation.  The Cap Rate is what translates income to value.

Single family properties are valued based on Comparative Market Assessment or more commonly known as "comps".  Cap Rate has no bearing whatsoever on the value of a single family property.