Good evening, Karl,

I would recommend looking at more than one data metric. Cap rates can certainly provide insight, but the challenge is ensuring that cap rates extracted from comparable properties are treating expenses similar to that of a property one is comparing them to. One example is some cap rates may include replacement reserves as an expense, while others may not have any replacement reserves in the cap rate. Using a cap rate that includes reserves and applying it to a property that does not include reserves can give an inaccurate indicator of value. That is just one example of why caution is necessary when using cap rates to evaluate a property.

If buying a property to hold as a long term rental, you also want to look at how many available units are currently on the market, and estimate the market absorption rate to determine how many months of inventory are available. The property someone is purchasing for long term rental will be competing with these other properties, and the property may or may not capture its market share. Furthermore, if there is more supply of units than demand, that is going to result in downward pressure to rental rates, whereas if there is a shortage of supply with potentially pent up demand, that is going to result in upward pressure on rental rates.

There are many factors to consider when evaluating a potential investment property purchase, and it’s important to analyze available data to make an informed decision without crossing the line into analysis paralysis. 

Bill