All Forum Posts by: Timothy Christian Jr

@Timothy Christian Jr

At the end of the day, it comes down to low market knowledge.

Whether 5+ units where cap rate is more critical or 2-4 units when comparative sales are the better metric, it’s all about market knowledge but for SALE values but also RENTAL values.

Start tracking EVERYTHING that comes in your market. Review rental rentals, review expense rates, determine if property sold and at what price. Over time, you will learn your market and you will KNOW from first hand market experience, what’s a good deal?

There’s no magic number that determines good deal v bad deal. It’s not that simple.

One final comment, while quantitive analysis (crunching the numbers) is important I suggest qualitative analysis is just as important. There are qualities to properties and locations, intuition based on local experience matters.

To the degree you develop your local market knowledge and hone your skills to develop the qualitative sense, you will begin to gain a competitive advantage.

That’s what I have in Greenville SC.

Good luck.

Arn

I am not going to give you equations, but hopefully can give you some practical insight.  I live in Plainfield which is the next major area next to Greenwood and it has very similar numbers.  They are both very suburban areas with a lot neighborhoods built in the 80s to 2000s

I bought my primary residence 10 years ago for $180K - 4/2.5 - 3000sf.  I could sell it now for about $400K.  On the other hand, 2 houses down from me is a rental house - exactly the same house and they are getting $2000-$2200K a month in rent only up from about $1800 from 10 years ago.

Our areas typically appreciate 7-10% year over year, but since 2020, sales have been increasing 13-21%.  Unfortunately, rental prices have not kept up at the same pace.  That being said, I have seen a lot of increases in the last 6 months.

For me, I am not investing in these 2 areas, but going just around them where the sales prices are slightly lower and the rental prices make more sense.  (Look at Decatur, Perry, and Franklin townships)

Hope that helps -- happy to discuss further..

@Timothy Christian Jr

A duplex should not go off of cap rate- first for acquisition you need to compare it to comparative sales.

Next is to review the NOI of the property and potential capex that is forthcoming.

The determine if you wish to buy it or not - remember whether you buy is up to you, something I would buy others would not and vice versa

There is no such thing as a good or bad cap rate. A cap rate is a reflection of the markets view of risk in the asset and market. The higher the cap rate, the higher the risk. The lower the cap rate, the lower the risk. Risk is neither good or bad.

1) Determine market CR
Find more duplex comps and calculate their CR, then reconcile those cap rates to estimate the market CR

2) Analyze the deal
Estimate the NOI (net annual operating income-after expenses) of your Subject duplex. This may include a proforma (projected income) from any value-adds you can do or raising rents, etc. Then you take the NOI and divide by your estimate market cap rate to get the estimated value.
Example:
market cap rate = 7%
Estimated NOI (annual) =$28,000
Value = $28,000/7% (or 0.07) = $400,000

Now, you can compare the value/s with the offer price of the Subject. So, you may decide that you want to purchase the Duplex for $300k and put $30k into, in order to raise the rents (proforma) to get to the $28k NOI and thereby raising the value to $400k.

So, basically, you are estimating the market CR, then you determine the income possibilities of the Subject, and then use the market CR to determine the deal potential.

3) MOST IMPORTANTLY
Cap rates are typically not that useful for 1-4 unit properties. 1-4's are typically valued by sales comps (comparables), not the income approach. Too much variability and motivation differences in 1-4 properties, to be useful. 

Hope that's helpful!