cap rate

[Aaron Cheatham]

Hello everyone hope everyone has a active weekend.
Anywho quick question.

What cap rate do most investors look for when it comes to rental property ? It seems wholesaling residential homes and rental properties are a bit different. What's the range of cap rate most investors buy at ?

Just so I have it right cap rate is NOI / ARV or purchase price ?

Thank you
Aaron

[J Scott]

Unless you're paying cash for the property, cap rate probably isn't the best measure to use for a single unit rental property.

Generally, cap rate is used for larger and more complicated investments where you're trying to screen for whether the investment passes an initial viability test. It allows you to do a first-pass analysis without having to dig in too far to the details.

But, for a single unit rental property, digging into the details isn't too difficult, so you can generally just pass right by the cap rate analysis and do more specific ROI type calculations, like cash-on-cash (COC) return and internal rate of return (IRR). Also, cash-flow (profit) is an important measure to a lot of landlords.

If you think you're interested in cap rate, you're probably really interested in COC return, as it takes into account the specific financing you'll be getting. And IRR is probably the measure you want to use to evaluate a property for a longer-term ROI.

For reference, many investors here look for $100/unit/month as the minimum cash-flow that they consider acceptable, I personally like to see a COC above 20% for rentals, and while IRR is interesting to evaluate after a project is sold, I don't think it's too valuable as a measuring tool upfront.

I (and I'm sure others here) are happy to expand on these concepts if you have more detailed questions...