Cap rate is a number based on other numbers so as it is an important number to look at, understand that most people that are calculating them do not understand the calculations either. Plenty of info on BP about CAP RATES so read up on that.
When I'm evaluating them I'll look past the cap rate and dig into the P&L's and rent rolls. (these are the derivatives of the cap rate calculation). Man I sound like my old math teacher!
Some are great and easy to follow, some look like a 5 year old put it together.
Take a look at the rent coming in.
1. Is it market rate?
2. if not, how much can you raise it? If you do raise it to market do you need to do rehab to be comparable to your competition or is it simply a deal where the PM just hasn't raised rent. Or it may be a case where it's performing like it should.
Take a look at the expenses.
1. Are they wasting money on paying their son-in-law $5k month to mow the grass? You would be surprised at how often this opens when it's mom and pop deals.
2. Is the money going out make sense? Taxes are usually the only thing you can't change.
3. Is the landlord picking up the water bill? Might be something you can sub meter or bill back to tenants.
4. look for ways you can decrease expenses. Typically there is always something.
As always it's good to have set a basis for what your trying to achieve.
1. Are you wanting a stabilized property that provides cash flow each month?
2. Do you want something that you can build equity in thru "cleaning" up the books? Increase rent & decrease expense.
pros and cons to both. Once you have that determined then just approach it using that goal in mind!
