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RE investors: cap rate question

1,894 Views | 14 Replies | Last: 18 days ago by 1939
aggiefan2002
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2:57p, 1/29/25
A question for the seasoned real estate investors on this board. I used to mostly pay attention to cash flow, but I've started paying cash for more properties lately which has led me to compare cap rates for a more apples to apples comparison.

What kind of cap rate are you looking for/seeing on your SFH properties? I averaged all of mine and am right at 7% based on today's rents and today's values. Not sure if that's good/bad/fine based on what I see online so curious what others are seeing.
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Heineken-Ashi
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In reply to aggiefan2002 • 7:44p, 1/29/25
aggiefan2002 said:
A question for the seasoned real estate investors on this board. I used to mostly pay attention to cash flow, but I've started paying cash for more properties lately which has led me to compare cap rates for a more apples to apples comparison.

What kind of cap rate are you looking for/seeing on your SFH properties? I averaged all of mine and am right at 7% based on today's rents and today's values. Not sure if that's good/bad/fine based on what I see online so curious what others are seeing.
7 is fair in this market. But not great. Ideally FMV would have a spread between cost of funds and cap rate. But residential is different than commercial in that respect, as the majority of buyers aren't looking at profitability to make their decision.
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MS08
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8:12p, 1/29/25
AG
Depends on a lot of factors. NOI, how many properties are there, how scattered are they, are they in one MSA, year built/deferred maintenance, class of property/tenant, and the current interest rates at that time are also a factor.

7 CAP is good for the buyer.
5 CAP is good for the seller.
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Heineken-Ashi
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1:01p, 1/30/25
But if you're paying all cash, I would look at UYOC (unlevered yield on cost) more than cap rate.

NOI / all in cost (purchase price, closings costs, capex, etc).

Get that above 7% and it's likely a pretty good deal. It tells you what % of your total investment is being returned yearly.
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maddiedou
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6:53p, 2/2/25
AG
Tell me how a cap work in a 5th grade explanation

Lets say I have a 8 mil property. No clue if this is right
Rent is roughly 730,000 a year
Expenses. Taxes 84,000
Insurance. 70,000
Water. 40,000
Other expense. 30-40,000 a year

What or how do you figure a cap rate

I have never used a cap rate but I have always heard about them and was just wondering a simple explanation of them

maddiedou
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MS08
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In reply to maddiedou • 7:27p, 2/2/25
AG
maddiedou said:
Tell me how a cap work in a 5th grade explanation

Lets say I have a 8 mil property. No clue if this is right
Rent is roughly 730,000 a year
Expenses. Taxes 84,000
Insurance. 70,000
Water. 40,000
Other expense. 30-40,000 a year

What or how do you figure a cap rate

I have never used a cap rate but I have always heard about them and was just wondering a simple explanation of them

Cap Rate does not include any debt service.

For Cap Rate you need to determine NOI (Net Operating Income).

Net Operating Income is all revenue of a property minus all expenses outside of debt service related line items.

In your example based on your value of $8mm and a NOI of $501k (730 - 84 - 70 - 40 - 35)
Your Cap Rate = 6.26% ($501,000 / $8mm) x 100

For quick calculation, if you know a property's annual rent roll & revenues, and assume a 35% Expense Ratio, you can estimate its NOI pretty closely. That almost holds true in this example as $730k x 65% is $474,500 so it gets you darn close to that $501k.

Hope that helps!
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maddiedou
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8:04a, 2/3/25
AG
It does Thanks

But if you were to add in the bank note why does that payment not adjust the NOI

I am sure it is a sound system but just seems a little off to me
maddiedou
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maddiedou
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8:06a, 2/3/25
AG
The bank note is roughly 50,000 a month give or take a 10,000 or so on interest and downpayment
maddiedou
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MS08
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In reply to maddiedou • 8:21a, 2/3/25
AG
maddiedou said:
The bank note is roughly 50,000 a month give or take a 10,000 or so on interest and downpayment
The bank note/financing metric is the Debt Coverage Service Ratio (DSCR):
= NOI / Annual Debt Service
It tells you how much free cash flow is or is not available to cover the debt obligation.

= ($501k / $600k) = .835 : which means you would be coming out of pocket monthly or pulling from cash reserves to cover your debt obligation.

For your DSCR you are looking for something over 1.
1.25 is good/the target. 1.2 at minimum.
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aggiefan2002
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3:16p, 2/4/25
A cap rate is often considered more helpful than cash on cash return because it allows for a direct comparison between different properties in the same market, regardless of financing structure, as it only considers the property's income relative to its market value, while cash on cash return is heavily influenced by the amount of leverage used in the purchase, making it less suitable for comparing properties with different financing terms.

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MS08
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In reply to aggiefan2002 • 10:54p, 2/4/25
AG
aggiefan2002 said:
A cap rate is often considered more helpful than cash on cash return because it allows for a direct comparison between different properties in the same market, regardless of financing structure, as it only considers the property's income relative to its market value, while cash on cash return is heavily influenced by the amount of leverage used in the purchase, making it less suitable for comparing properties with different financing terms.



Well said statement
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Heineken-Ashi
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In reply to aggiefan2002 • 2:48p, 2/5/25
aggiefan2002 said:
A cap rate is often considered more helpful than cash on cash return because it allows for a direct comparison between different properties in the same market, regardless of financing structure, as it only considers the property's income relative to its market value, while cash on cash return is heavily influenced by the amount of leverage used in the purchase, making it less suitable for comparing properties with different financing terms.

Also why I like UYOC as I mentioned above, as it takes into account the all-in costs without the leverage component. It's essentially telling you the cash on cash as if you went in the deal with 100% cash.
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1939
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10:33p, 2/10/25
AG
Also note that capex is not included in NOI. It's debatable if a replacement reserve should be, different people will tell you yes and no.
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maddiedou
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7:47a, 2/11/25
AG
I understood MS first explanation but have no clue what the others said yall must be very successful to figure all this crap out

I am gonna just stick to working and understand I got lucky with what I bought and leave it at that

I dont plan on selling but was kust wondering I have those people and yall know who I am talking about the big realtors out of Dallas always sending me stuff and talking about cap rate and I never understood how a cap rate determine how much a property is worth

And the numbers never made sense to me with income and expenses
maddiedou
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1939
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In reply to maddiedou • 3:48p, 2/12/25
AG
Cap rates don't really apply to single family housing anyway because that isn't how homes are valued. Anything piece of real estate can have a cap rate but in the case of single family homes they aren't really relevant.
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