All Forum Posts by: Sylvia B.

Thank you. I'll look into that.

First let me be sure I understand what it is.

Capitalization Rate = Yearly Income/Total Value

Now right here I already have a problem. I would expect "Total Value" to be what it cost me, but apparently I'm mistaken. Here is an example I read:

"For example, if Steven buys a property that will generate $125,000 per year and he pays $900,000 for it, the cap rate is: 125,000/900,000 = 13.89%."

So far, so good, but it continues:

"But it gets a little more complicated. What if the property's value rises to $2 million two years later? Now the cap rate is a less favorable 125,000/2 million = 6.25%."

So if I have a property that I over-improved, it seems to me that the cap rate would be a useless number. Say I buy a property for 50k, put 50k into improvements and other costs, and the yearly income is 10k. That should equal a cap rate of 10%. However, the market value of the property is only 75k. Using that number gives a cap rate of 13.3%.

This doesn't make sense to me. What am I missing?

Secondly, is the cap rate useful for comparing different kinds of investments? For instance, is it meaningful to compare a cap rate on a 100k RE investment with a return on a 100k mutual funds investment? If not, what does it really tell me?

You mentioned that the stairs were very narrow & had a turn. How would combining the two rooms upstairs into one alleviate that problem?

@Kim H.

I know this thread is old, but I'm curious. What did you decide to do?

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It's because of the way the "reality" shows portray flippers. They are either idiots who don't know which end of a hammer to use or jerks who only care about their budget and their schedule, or both.

This is more of a rant than anything. It seems to me that many landlords in my small town are unintentionally suppressing rental rates because they are afraid to ask a reasonable rent.

An acquaintance of ours is a general contractor who builds houses on spec. If they don't sell he rents them out. He just finished a 3/1/2 that he wants $95k for. He is renting it for $500/mo for 6 months, and then the rent goes to $600. Apparently the renter is someone he knows who is in financial difficulty and the guy wants to help him out.

For comparison, 2/1/1 duplexes less than 4 years old in a new development rent for $600. They are never vacant for more than a week or two.

It's frustrating.

Thank you, Adam, I do appreciate the advice. If I thought I had it all figured out I wouldn't come here and ask questions. It's always a good thing when you can pick the brains of people who have more experience. One comment, though, about robbing the cashflow of other properties. We would only do that so that it could be paid off quickly. If we wanted to get a 30 or even 15 year mortgage the property would support itself.

Cashflow, yes, and I purposely left out the expected rent. Rents in our area are much lower than what I've seen posted on here, and I didn't want to distract from the purpose of my post. I would be highly surprised if there is ANY house renting for more than $800.

Now about your assumptions:

1. We budgeted $5k for repairs, inspection, and closing costs total.

2. Closing costs will be approx. $750, at a purchase price of $73,500 it would be $78,500 rental ready.

3. I think this house will be closer to 35% for many years. It's fairly new, so repairs should be low for a while, no property management fee, and taxes & insurance should run about $1,000-1200/year. We would pay for it with about 1/2 cash and 1/2 on a line of credit, and should have it paid off in 18 months.

4. I don't know what "market cap rate" is, so I don't know how to answer that. Instead let me tell you our muddled computations. We should get $650/month on this property. 100 T&I + 150 for repairs(set back if not spent) leaves $400/month for debt service. We have 3 other properties that are rented that we own outright. Rents are $500, 650 and 6,000 (that last one is commercial). After expenses we have $200, 300 and 5500 that we can use for debt service and investment. Monies from those rentals would go to pay off this purchase. This is why I left out the detail about the rent. I know everyone would just focus on that and advise passing without answering the question I'm really asking.

As I said in my last post, our gut feeling is to walk away, and we're listening to it. I do tend to second guess myself, so I wondered if $3k was enough to make others walk or if we were quibbling. If you were willing to pay $70k would you stretch to 73k or just say no?

Thank you, Adam, excellent advice. We didn't really start at the asking price and work backwards, though I see how I may have given that impression. Our guts are in sinc. We're walking away.