Buying On Cap Rate
How does the cap rate figure into your buying process for an apartment building? It seems like the higher the cap rate, the more affordable the property is? Would you buy strictly based on the cap rate?
CAP rate (NOI/Price) is important so you could compare your property to others in the area as well as to see how it is performing. This comparison should help you see if you get a good deal or overpaying.
However, when you buy a multiunit, it is very important to also have a good DSCR(debt service coverage ratio) . For example most bank want to see a minimum of 1.2 and honestly I wouldn’t want to buy anything below that myself. DSCR =NOI/Annual Mortgage Payment.
Hope that helps
Good Investing!
Cap rates as previously spoken of are used to analyze a property- it provides the borrower or broker with a direct capitalized value of the property, it further allows a broker to determine the maximum loan amount. For example: You find a property that is listed for sale at $1,800,000 and to have a NOI of $100,000, your market research tells you the Cap rates for your area are about 10%, so the direct capitalized value is (NOI/cap rate) is $1,000,000. Applying the underwritten constraint 80% LTV which tells you the maximum loan amount is (Direct Capitalized valueXLTV) $800,000. This means that if you are going to buy this property you have to come up with more cash or negotiate a lower selling price for the property.
[addsig]
If the construction cost is that much higher than aquistion then yes, you need to buy the property first, then get all your architectural and plans done, estimates on construction cost, plans approved by the city then take all that to the lender who will give you a construction loan based on the appraisal of the plans.
take the overall incom from the property and diveide by the price or value. if you come up with a percentage that is high like over 12% that means that there is a lot of risk. If it is low around 8.5% then there is a lesser risk there. Not that its not profitable but more chance.Also take the yield rate per year and match it up against this. if they yield is higher than the risk then you are okay but if its lower you should study it some more.
Dolores,
That helps. I analyze my investments as if they were passive as well. Can you give me a rule of thumb for repairs? This is a 20 unit complex that is roughly 20 yrs old.
Thanks
Well I can give you better than a rule of thumb-- though it may cost you a little to follow.
The Institute for Real Estate Management every year publishes a series of Income and Expense analysis books for various types of property (apartments, office buildings, subsidized apartments, etc.) which breaks down expense numbers by city and shows them by $/square foot and as a percentage of GPTI. Very helpful, although you really only need a few pages of the whole guide.
Thanks.
It looks like it costs $365! Is it worth it? What is your experience with it?