Author Topic: CAP RATES Where did new (and old) investors learn to misuse them?  (Read 11718 times)

honobob

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It baffles me when I read in real estate forums and people calculate and use "cap rates" inappropriately.  It's like two 12 year old boys talking about sex.  They have the gist of it but it is laughable to think they have a working knowledge. 

1.  There is an exact method to calculating a cap rate.  Guessing 50% for expenses is ridiculous.  If the vacancy rate is actually 5% vs. 15% it will make a HUGE difference even if expenses do come to about 50% for both properties.
2.  Cap rates are utilized in commercial properties because they can have income streams that can include above market, below market. and market rents with different durations.  A cap rate is calculated to simplify COMPARISON to other income streams.
3.  Cap rates CHANGE and are property type and LOCATION dependent.  A cap rate is established BY THE MARKET.  If you think a 10% cap rate is sweet you'd be a fool if you found out properties of your type and location have sold at a 15% cap rate. 
4.  If Class A office properties are selling for 5% cap in SF and 10% in Detroit it means the market has determined that SF properties are MORE desirable.  So chasing across the country for "better" cap rates is akin to a dog trying to sniff the golden butthole. 
5.  For commercial properties there are publications that report cap rates on ACTUAL sales. These are used by INVESTORS  to determine what the market is doing and at what cap rate investors are buying income streams.  THEN they make a determination of what they will offer on a property.  They will look at a cap rate but they will determine if their subject property has upside.  Ex. a large block of space that has 20 year old leases at 50% less than market rent are due to come up for renewal or expiration.  They would offer more than current cap rates because they hope to see a dramatic increase in rental income.  Most residential properties have short term leases so their rental income is generally ALWAYS market. 
6. If two commercial properties are vacant and similar they will sell based on SALES COMPARISONS.  Just like residential properties there would be no need for a cap rate.   

Is there any use for cap rates for residential properties?

marty998

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Re: CAP RATES Where did new (and old) investors learn to misuse them?
« Reply #1 on: December 18, 2013, 03:30:50 PM »
You think you have problems.

* Few here take into account that gains and investment returns should primarily come from capital gains. Yield should be a growing added bonus.
* Even fewer understand negative gearing.
* I just saw a thread about someone buying a house for $20,000. A house!!! I could cry LOL. I will have to shell out  almost 30x that for my next place.

It's comparing chalk and cheese I know, but coming here for real estate discussion is very very odd compared to the various local Aussie property forums.

One thing that is the same anywhere is the misleading reporting of auction clearance rates. Never, ever trust anyone who uses auction clearance rates in real estate marketing.

arebelspy

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Re: CAP RATES Where did new (and old) investors learn to misuse them?
« Reply #2 on: December 18, 2013, 03:59:46 PM »
1.  There is an exact method to calculating a cap rate.  Guessing 50% for expenses is ridiculous.  If the vacancy rate is actually 5% vs. 15% it will make a HUGE difference even if expenses do come to about 50% for both properties.

I agree. However, since studies have shown that expenses, over the long run, tend to come out to about 50% of gross income, it's a decent rule of thumb to apply before getting more specific numbers.

2.  Cap rates are utilized in commercial properties because they can have income streams that can include above market, below market. and market rents with different durations.  A cap rate is calculated to simplify COMPARISON to other income streams.

Sure.  And they can be used in residential rentals as well for similar purposes.

3.  Cap rates CHANGE and are property type and LOCATION dependent.  A cap rate is established BY THE MARKET.  If you think a 10% cap rate is sweet you'd be a fool if you found out properties of your type and location have sold at a 15% cap rate. 

Correct.

4.  If Class A office properties are selling for 5% cap in SF and 10% in Detroit it means the market has determined that SF properties are MORE desirable.  So chasing across the country for "better" cap rates is akin to a dog trying to sniff the golden butthole. 

More desirable depending on what you're looking for.  They're not more desirable if you're looking for a high cap rate.  ;)

5.  For commercial properties there are publications that report cap rates on ACTUAL sales. These are used by INVESTORS  to determine what the market is doing and at what cap rate investors are buying income streams.  THEN they make a determination of what they will offer on a property.  They will look at a cap rate but they will determine if their subject property has upside.  Ex. a large block of space that has 20 year old leases at 50% less than market rent are due to come up for renewal or expiration.  They would offer more than current cap rates because they hope to see a dramatic increase in rental income.  Most residential properties have short term leases so their rental income is generally ALWAYS market. 

What's your point with this?

6. If two commercial properties are vacant and similar they will sell based on SALES COMPARISONS.  Just like residential properties there would be no need for a cap rate.   

Maybe.

Is there any use for cap rates for residential properties?

The main point would be to calculate something similar to an ROI.  Do you have the same issue with cash on cash return?  I calculate all of those numbers, as well as my total return (which includes appreciation).    Is it wrong for someone investing in stocks to look at their dividend return separately from their total return?  If not, why do you care if someone in real estate does the same thing?

* Few here take into account that gains and investment returns should primarily come from capital gains. Yield should be a growing added bonus.

Why should your return come primarily from appreciation?

Cash flow is often a primary metric real estate investors use.  Appreciation is often a primary metric speculators use.  Now that's not to say each may not use the other, but in general, investors tend to look first at cash flow, then look at how the appreciation will affect their return.

BOTH come into play.

* Even fewer understand negative gearing.

And?  Are you just venting, or what?  There's a lot of people here that don't understand forward P/E either, should we add in other random calculations and metrics the average person doesn't understand?

* I just saw a thread about someone buying a house for $20,000. A house!!! I could cry LOL. I will have to shell out  almost 30x that for my next place.

And?  That could be way overpriced.  Or way under.  We don't know anything about the market, so we can't say.

All real estate is local, and is highly dependent on the market.
« Last Edit: December 18, 2013, 04:01:17 PM by arebelspy »
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KingCoin

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Re: CAP RATES Where did new (and old) investors learn to misuse them?
« Reply #3 on: December 18, 2013, 04:18:50 PM »
LOUD NOISES!!!!

Are we arguing about something here, or is this just a round-about way to fight about cash flow vs appreciation again?

The attitude that all prices are "correct" because the market "sets" them sounds suspiciously EMT coming from a guy who believes he can beat the market by choosing to invest in certain areas rather than others. Or does EMT only apply to people whose methodology you disagree with?

arebelspy

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Re: CAP RATES Where did new (and old) investors learn to misuse them?
« Reply #4 on: December 18, 2013, 04:25:21 PM »
LOUD NOISES!!!!

Are we arguing about something here, or is this just a round-about way to fight about cash flow vs appreciation again?

It's the same old shit.

I almost didn't post, then I thought about the new investors who will come and read and not get an alternate perspective, so I took the time to respond.  I know it won't make a difference with honobo, but it might for someone else.
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marty998

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Re: CAP RATES Where did new (and old) investors learn to misuse them?
« Reply #5 on: December 18, 2013, 05:22:25 PM »
Loud noises is probably on the money.

Cap rates don't mean much to me. I only made the point I did because when people have a single focus on yield they miss the much larger potential for capital gain.

If people are happy to focus on yield fair enough, I don't want to argue the point much more. It's just my experience suggests that capital gains (and losses) are a far bigger influence on returns than yield.

Every property market is different.
Every property within a market is different
Every tenant is different

Which suggests it's very hard to compare properties, even the cookie cutter apartment blocks which are all the same.

AlexK

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Re: CAP RATES Where did new (and old) investors learn to misuse them?
« Reply #6 on: December 18, 2013, 11:39:58 PM »
Professional agents use cap rate all the time when describing residential properties, especially apartment buildings.

It is just (net income) / price, a useful metric to evaluate just about any type of investment. Why the hate for the new investors trying to learn?

Oh and speaking of cap rates, why so many capital letters in the OP?


honobob

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Re: CAP RATES Where did new (and old) investors learn to misuse them?
« Reply #7 on: December 19, 2013, 02:54:24 AM »
LOUD NOISES!!!!

Are we arguing about something here, or is this just a round-about way to fight about cash flow vs appreciation again?I'm



It's the same old shit.

I almost didn't post, then I thought about the new investors who will come and read and not get an alternate perspective, so I took the time to respond.  I know it won't make a difference with honobo, but it might for someone else.
I'm not sure "incorrect" is a viable alternative.  Is that what you're trying to sell?  You obviously have no experience with cap rates.  is that a reason to be rude to me? 


honobob

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Re: CAP RATES Where did new (and old) investors learn to misuse them?
« Reply #8 on: December 19, 2013, 03:08:27 AM »
Professional agents use cap rate all the time when describing residential properties, especially apartment buildings.

It is just (net income) / price, a useful metric to evaluate just about any tyI'mpe of investment. Why the hate for the new investors trying to learn?

Oh and speaking of cap rates, why so many capital letters in the OP?
no hate for new investors trying to learn but disdain for those here teaching them incorrectly.  Anyone can call their assessor or an appraiser and ask about cap rstes for sfh or small rentals tomorrow.  They will be told thst cap rates are NOT used.  End of story!   NO cap rates for residential property.

arebelspy

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Re: CAP RATES Where did new (and old) investors learn to misuse them?
« Reply #9 on: December 19, 2013, 05:44:43 AM »
I'm not sure "incorrect" is a viable alternative.  Is that what you're trying to sell?  You obviously have no experience with cap rates.  is that a reason to be rude to me?

I don't see how my post was rude.

As for the rest of this post, I choose not to engage you. 
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arebelspy

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Re: CAP RATES Where did new (and old) investors learn to misuse them?
« Reply #10 on: December 19, 2013, 05:47:15 AM »
Professional agents use cap rate all the time when describing residential properties, especially apartment buildings.

It is just (net income) / price, a useful metric to evaluate just about any tyI'mpe of investment. Why the hate for the new investors trying to learn?

Oh and speaking of cap rates, why so many capital letters in the OP?
no hate for new investors trying to learn but disdain for those here teaching them incorrectly.  Anyone can call their assessor or an appraiser and ask about cap rstes for sfh or small rentals tomorrow.  They will be told thst cap rates are NOT used.  End of story!   NO cap rates for residential property.

They are not used for sales, no.  An appraiser would not use cap rates to determine value in residential real estate.  No one is saying they would.

An investor might use them to compare properties and calculate potential returns.
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Re: CAP RATES Where did new (and old) investors learn to misuse them?
« Reply #11 on: December 21, 2013, 09:50:44 PM »
LOUD NOISES!!!!

Are we arguing about something here, or is this just a round-about way to fight about cash flow vs appreciation again?

It's the same old shit.

I almost didn't post, then I thought about the new investors who will come and read and not get an alternate perspective, so I took the time to respond.  I know it won't make a difference with honobo, but it might for someone else.

It had value for me, since you were typing what I was thinking, only better. :)

honobob

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Re: CAP RATES Where did new (and old) investors learn to misuse them?
« Reply #12 on: December 21, 2013, 10:29:41 PM »
Professional agents use cap rate all the time when describing residential properties, especially apartment buildings.

It is just (net income) / price, a useful metric to evaluate just about any tyI'mpe of investment. Why the hate for the new investors trying to learn?

Oh and speaking of cap rates, why so many capital letters in the OP?
no hate for new investors trying to learn but disdain for those here teaching them incorrectly.  Anyone can call their assessor or an appraiser and ask about cap rstes for sfh or small rentals tomorrow.  They will be told thst cap rates are NOT used.  End of story!   NO cap rates for residential property.

They are not used for sales, no.  An appraiser would not use cap rates to determine value in residential real estate.  No one is saying they would.

An investor might use them to compare properties and calculate potential returns.

Actually Cap rates are the result of sales.  There is no reporting of market cap rates for residential sales so even if you went to the trouble of actually computing a residential Cap Rate it is of what use since you don't have reliable information of market residential Cap Rates.  As far as comparing properties you can easily use a GRM in the correct method instead of miscalculating and misusing a crap rate.  How are you using a cap rate to calculate potential returns.  A correctly calculated cap rate is based on one set of figures at one point in time.  It does NOT indicate returns so how would you use it?

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Re: CAP RATES Where did new (and old) investors learn to misuse them?
« Reply #13 on: December 21, 2013, 10:32:56 PM »
Should I not use my weight as an indicator of whether I'm getting in shape, because my insurance company uses BMI instead? Data without context is always meaningless, and maybe cap rates aren't the best metric out there. But they're one of many, and it doesn't seem like keeping track of them (in context) is doing any damage when evaluating properties.

honobob

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Re: CAP RATES Where did new (and old) investors learn to misuse them?
« Reply #14 on: December 21, 2013, 10:55:59 PM »
Should I not use my weight as an indicator of whether I'm getting in shape, because my insurance company uses BMI instead? Data without context is always meaningless, and maybe cap rates aren't the best metric out there. But they're one of many, and it doesn't seem like keeping track of them (in context) is doing any damage when evaluating properties.
1. I don't care if you take half the rents and divide it by a price to come up with a number.  But IT is not a cap rate.  Call it something else but to use that calculation and say you have a cap rate is ignorant.  Why not use the GRM?  Reflects the same ratio of rents to price and you are are calculating and using a real estate term correctly.  Why is that so wrong?
2.  The damage I see is that since this results in a percentage some people think they can use it as a yield and even compare it to interest rates on Cd's or stock market returns.  That is troubling since there is no comparison.  The other damage I see is when people think the number is absolute and they think a 10% cap rate is better than a 5% cap rate and go chasing rainbows. The damage comes from calculating and not understanding the use of a cap rate.
3.  JT, how do you calculate and use a cap rate to evaluate properties in your experience?

arebelspy

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Re: CAP RATES Where did new (and old) investors learn to misuse them?
« Reply #15 on: December 22, 2013, 10:43:25 PM »
Should I not use my weight as an indicator of whether I'm getting in shape, because my insurance company uses BMI instead? Data without context is always meaningless, and maybe cap rates aren't the best metric out there. But they're one of many, and it doesn't seem like keeping track of them (in context) is doing any damage when evaluating properties.
1. I don't care if you take half the rents and divide it by a price to come up with a number.  But IT is not a cap rate.  Call it something else but to use that calculation and say you have a cap rate is ignorant.  Why not use the GRM?  Reflects the same ratio of rents to price and you are are calculating and using a real estate term correctly.  Why is that so wrong?
2.  The damage I see is that since this results in a percentage some people think they can use it as a yield and even compare it to interest rates on Cd's or stock market returns.  That is troubling since there is no comparison.  The other damage I see is when people think the number is absolute and they think a 10% cap rate is better than a 5% cap rate and go chasing rainbows. The damage comes from calculating and not understanding the use of a cap rate.
3.  JT, how do you calculate and use a cap rate to evaluate properties in your experience?

Ugh.

I'm not going to reply to this, for the reasons stated earlier.

I don't think it would be productive or there would be a point, and I don't feel like trying to hit my head against a brick wall.

But if you are a new real estate investor confused by honobob's post and find yourself agreeing, disagreeing, or just plain not sure, please feel free to PM me to discuss.
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Re: CAP RATES Where did new (and old) investors learn to misuse them?
« Reply #16 on: December 23, 2013, 05:43:46 AM »
Any projection of net income from an asset divided by the price or a value ascribed is a capitalization rate.  The P/E of a stock is the inverse of the capitalization rate of that stock.

Anyone that uses GRM's to make a purchase decision without looking at the income and expenses is foolish.  Take two apparently identical four-plexes side by side.  One has a lower GRM than the other, so you would buy that one, right?  Well, not so fast.  If one of them is separately metered for water and the other is not or one has all new hot water heaters, stoves and refrigerators and the other has original units, the net income differences may account for the differences in the GRM.  You don't eat potential or effective gross income.  You eat net income.

As you gain experience, you learn why one capitalization rate is higher than another.  A 12 cap rate in a war zone may mean the property is priced above market.  A 6 cap rate may be a great deal in Manhattan.  A new property leased to quality tenants will usually have a lower capitalization rate than an older property lease to Class B and C tenants if the rents are all at market. 

We are not ignorant people here, with Honobob the lone voice crying in the wilderness.  We are experienced investors and real estate professionals, sharing our knowledge and experience.  No one wants new investors to make expensive mistakes and in my view the regular commenters in this category offer a lot of information on how to avoid some of the common errors.

KingCoin

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Re: CAP RATES Where did new (and old) investors learn to misuse them?
« Reply #17 on: December 23, 2013, 08:40:19 AM »
We are not ignorant people here, with Honobob the lone voice crying in the wilderness.

The lone voice? I feel like this has become a straw man argument. Who are these investors who look at cap rate and nothing else as an investment criteria? I feel like we might be confusing people who use cap rate as a starting point of comparison for people who use it as the only point of comparison.

While certainly experience is valuable, any newbie investor with two brain cells to rub together is going to think about things like property condition, neighborhood and tenant quality, and the condition of the local real estate market. This is not strictly the provenance of grizzled pros.

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Re: CAP RATES Where did new (and old) investors learn to misuse them?
« Reply #18 on: December 23, 2013, 12:13:36 PM »
Should I not use my weight as an indicator of whether I'm getting in shape, because my insurance company uses BMI instead? Data without context is always meaningless, and maybe cap rates aren't the best metric out there. But they're one of many, and it doesn't seem like keeping track of them (in context) is doing any damage when evaluating properties.
1. I don't care if you take half the rents and divide it by a price to come up with a number.  But IT is not a cap rate.  Call it something else but to use that calculation and say you have a cap rate is ignorant.  Why not use the GRM?  Reflects the same ratio of rents to price and you are are calculating and using a real estate term correctly.  Why is that so wrong?
2.  The damage I see is that since this results in a percentage some people think they can use it as a yield and even compare it to interest rates on Cd's or stock market returns.  That is troubling since there is no comparison.   The other damage I see is when people think the number is absolute and they think a 10% cap rate is better than a 5% cap rate and go chasing rainbows. The damage comes from calculating and not understanding the use of a cap rate.
3.  JT, how do you calculate and use a cap rate to evaluate properties in your experience?

Maybe I'm one of those newbie investors with only a handful of brain cells, but if you can't use cap rates to compare to other asset classes, how do you avoid buying into commercial RE when the market as a whole is overpriced?  I'm thinking about commercial investors that got burned after jumping in full force in 2005-2007 only to take horrific losses in the ensuing years during the Great Recession.  Some of the prices being paid at that time were astronomical, but I would guess that comparing to comparable property types and cap rates for a given area that they seemed reasonable on paper.  How does one guard against this risk if cap rates aren't in any way supposed to be used as a comparison to other investment vehicles?

KingCoin

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Re: CAP RATES Where did new (and old) investors learn to misuse them?
« Reply #19 on: December 23, 2013, 12:34:43 PM »
Maybe I'm one of those newbie investors with only a handful of brain cells, but if you can't use cap rates to compare to other asset classes, how do you avoid buying into commercial RE when the market as a whole is overpriced?  I'm thinking about commercial investors that got burned after jumping in full force in 2005-2007 only to take horrific losses in the ensuing years during the Great Recession.  Some of the prices being paid at that time were astronomical, but I would guess that comparing to comparable property types and cap rates for a given area that they seemed reasonable on paper.  How does one guard against this risk if cap rates aren't in any way supposed to be used as a comparison to other investment vehicles?

It does of course make abundant sense to compare expected returns in different asset classes. Every asset class is going to have different risk/return characteristics, as well as different sensitivities to things like economic growth and inflation, but to say you can't compare opportunities because they're different is crazy.  As investors, we're always pitting different investment opportunities against each other.

A simplified example: after doing research, you decide that an investment property should return 10% in cash flow and appreciation. In a world where 10y treasuries are yielding 1.5% that may look very attractive; in a world where 10y treasuries are yielding 15% that would likely be a horrible investment. To argue that the risk free rate should have no bearing on your investment decision makes no sense.  In the corporate bond world, investors usually look almost exclusively at spread to treasuries or libor, making this comparison between asset classes direct and explicit.

Of course, in the real world, the decision is rarely going to as obvious as the example above (which is why people develop balanced portfolios rather than going all-in on one asset class), but it might ring an alarm bell when risky assets are yielding only a small spread to low risk assets, as commercial real estate did in 2005-2007.
« Last Edit: December 23, 2013, 12:37:18 PM by KingCoin »

honobob

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Re: CAP RATES Where did new (and old) investors learn to misuse them?
« Reply #20 on: December 23, 2013, 07:10:04 PM »

Ugh.

I'm not going to reply to this, for the reasons stated earlier.

I don't think it would be productive or there would be a point, and I don't feel like trying to hit my head against a brick wall.

But if you are a new real estate investor confused by honobob's post and find yourself agreeing, disagreeing, or just plain not sure, please feel free to PM me to discuss.

I am still waiting for anyone to show how they are calculating a real cap rate for SFH and how they are using it to be meaningful in any way.   Those that have contacted me directly have expressed concern about posting here to get information because of the ire I seem to get by posting correct information.  Now you want to go behind closed doors to further spread incorrect information.  If you are so sure of your position why not put it out here for all to participate and make up their own mind?
« Last Edit: December 23, 2013, 10:58:45 PM by honobob »

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Re: CAP RATES Where did new (and old) investors learn to misuse them?
« Reply #21 on: December 23, 2013, 08:12:22 PM »
Not once has any of the experienced investors here suggested determining the market value of single family houses by using capitalization rates.  In most single family markets, value is driven by owner-occupants that do not look at the potential income producing capacity of the property.  However, it is perfectly reasonable to estimate the net income a property could produce and compare it to the price you would likely have to pay to estimate a capitalization rate.  You can also divide your estimate of net income by your required capitalization rate to figure out what you would be willing to pay for the property,  That's called "investment value."  The term is probably still in the Dictionary of Real Estate Appraisal, at least it was a couple of decades ago.

You can be sure all the hedge funds and other groups that have bought large portfolios of single family rentals ARE using cap rates to "value" those portfolios.  They have nice discounted cash flow analyses to show the "value" is correct.  That's because they want to securitize the assets and the income those assets produce as their exit strategy.   And you need investment value to do that.

honobob

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Re: CAP RATES Where did new (and old) investors learn to misuse them?
« Reply #22 on: December 23, 2013, 10:48:47 PM »
Not once has any of the experienced investors here suggested determining the market value of single family houses by using capitalization rates. What is the suggested use of a cap rate? In most single family markets, value is driven by owner-occupants that do not look at the potential income producing capacity of the property.  However, it is perfectly reasonable to estimate the net income a property could produce and compare it to the price you would likely have to pay to estimate a capitalization rate. ??? Are you just calculating a cap rate for the sake of coming up with a number?  Or are you saying that price paid (market value) IS being calculated from a cap rate? You can also divide your estimate of net income by your required capitalization rate to figure out what you would be willing to pay for the property,  That's called "investment value."  The term is probably still in the Dictionary of Real Estate Appraisal, at least it was a couple of decades ago.

You can be sure all the hedge funds and other groups that have bought large portfolios of single family rentals ARE using cap rates to "value" those portfolios.  They have nice discounted cash flow analyses to show the "value" is correct.  That's because they want to securitize the assets and the income those assets produce as their exit strategy.   And you need investment value to do that.
I doubt anyone is using non existent cap rates to value their properties or their portfolios.  The hedge funds are more interested in rent growth and appreciation.  Cap rates for SFH are not reliable and are not meaningful in any way for SFH's and are not used by professional investors. 

Mazzinator

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Re: CAP RATES Where did new (and old) investors learn to misuse them?
« Reply #23 on: December 23, 2013, 11:39:59 PM »
Where do you find info on rent growth and appreciation?

arebelspy

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Re: CAP RATES Where did new (and old) investors learn to misuse them?
« Reply #24 on: December 24, 2013, 07:54:17 AM »
Those that have contacted me directly have expressed concern about posting here to get information because of the ire I seem to get by posting correct information.

I call bullshit on that.  In fact, how about a friendly wager?  I'll put up proof of those that have directly contacted me with complaints about you, and you put up proof of those that have contacted you with complaints about everyone else combined.  Loser is banned from posting for a month.

Now you want to go behind closed doors to further spread incorrect information.

/eyeroll

I want to "go behind closed doors" (i.e. discuss in PMs) to not clutter up the forums with the same old argument.  You prefer to * in public.  I don't.

As far as "spreading incorrect information?"  Don't accuse me of that again please without some proof.

That said, you are the one spreading incorrect information, IMO, and here's my proof of it.

You say:
Cap rates for SFH are not reliable and are not meaningful in any way for SFH's and are not used by professional investors. 

I disagree, as do most posters here.  But since that isn't enough for you, check out this article from BiggerPockets:
http://www.biggerpockets.com/renewsblog/2013/03/30/battle-of-the-cap-rates/

It's all about cap rates on SFRs.

Further, Frank Gallinelli, the author of What Every Real Estate Investor Needs to Know About Cash Flow... And 36 Other Key Financial Measures comments on it, saying:
Quote
An excellent article, Ali. In fact it should be required reading for every newly-minted investor.

He makes a good point in the comments as well that I think both you and I will agree with:
Quote
Cap rates are essentially a market-driven metric — a market cap rate represents the rate of return that investors in a particular location are actually achieving with a certain property type (office retail, etc.). As such, you really can’t describe a rate as being high or low universally. A 9% cap rate on a particular property might seem very high to an investor in midtown Manhattan, while the same rate could seem very low to someone in Upper Dry-Rot County.

I don’t want to invent any new terminology (we have enough already) but perhaps a way to wrap your mind around this is to start by recognizing that the market cap rate is, as I said, the rate of return other investors are actually achieving for a given property type in this location. Then, when looking at a particular property, calculate its cap rate and ask, “Is this property yielding a market cap rate, an above-market rate or a below-market rate?” I think describing a property as being above or below the market rate will tell you more than describing it as having a high or a low rate.

You say they aren't used by professional investors, I say that plenty do.

Are cap rates used for SFRs?  Yup.  Can they be misapplied and incorrectly used?  Absolutely.  (They are way more applicable - even designed for - commercial properties.)

But do professionals often use them for SFRs?  Yes.  Are they completely useless?  No way.

Okay, so playing this out... now you post some article where someone talks about cap rate with commercial, and I'll agree with most/all of it, but you'll add on one throwaway line at the end of your post that says they don't work for SFRs, with no substantial reason why or proof.

As I said before, you don't use cap rates for SFRs.  But, believe it or not, you aren't the only real estate investor out there, and that doesn't negate the fact that people do use them.  The proof is above, they are used.

So can we finally agree to disagree on this and stop bickering about it?
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honobob

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Re: CAP RATES Where did new (and old) investors learn to misuse them?
« Reply #25 on: December 24, 2013, 11:46:11 AM »
Those that have contacted me directly have expressed concern about posting here to get information because of the ire I seem to get by posting correct information.

I call bullshit on that.  In fact, how about a friendly wager?  I'll put up proof of those that have directly contacted me with complaints about you, and you put up proof of those that have contacted you with complaints about everyone else combined.  Loser is banned from posting for a month.


Mod Edit: Personal Attack Removed. Please refer to forum rule#1 - Don't be a jerk, forum rule#2 - Attack an argument not a person and forum rule #4 - Be respectful of the site and other members.


Do you really think I care if some internet posters don't like me?  Remember, I was a professional model.  Now if they want to complain that the information I am giving is incorrect bring it on!  The people that have contacted me are not complaining about other posters personalities just that they rely on attacks against me or anyone that dares to challenge anyones "facts". I also would not betray their trust in me.  If they wanted to go public that is their decision.   As far as me not posting here for a month I accomplished that on my own recently.  I only posted again in response to someone saying an 11% cap rate was "sweet". 

How about a real challenge?  Pick one of your deals and show the cap rate calculations from your cap rate comps and for your property.  ALL of us could then join in the analysis of the benefits of your calculations.  Mod Edited: Everyone please refer to our forum rules and take note of Graham's Hierarchy of Disagreement and stay within the top three levels. http://www.mrmoneymustache.com/forum/forum-information-faqs/forum-rules/
« Last Edit: December 24, 2013, 12:17:03 PM by swick »

Another Reader

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Re: CAP RATES Where did new (and old) investors learn to misuse them?
« Reply #26 on: December 24, 2013, 11:57:42 AM »
Skip the pictures, Honobob, post your C.V., and let us vet you. 

arebelspy

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Re: CAP RATES Where did new (and old) investors learn to misuse them?
« Reply #27 on: December 24, 2013, 12:04:19 PM »
No, we don't need to interrogate individual members.

Let's let arguments stand on their own.

The first part of my post was immature, and I apologize.  However, I don't think this is an unfriendly place for people to post at all, and that you made that up.

Care to address the rest of the post, link, etc.?
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honobob

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Re: CAP RATES Where did new (and old) investors learn to misuse them?
« Reply #28 on: December 24, 2013, 12:12:48 PM »
Where do you find info on rent growth and appreciation?
Mazzinator,  the best place to get this is from an actual investor in your area and investing in the same type of properties you plan to pursue.  A local Realtor that sells to investors is another good source.  I've used Neighborhoodscout.com and have found it to be reasonably accurate in four states that I am familiar with.  It does not report by property type and reports an average annual number so OK for comparing their numbers with their numbers but you always want to be comparing apples to apples.  You could always look at census reports or old classifieds.

You also want to see when any growth or appreciation has occurred.  I check in about 10 year intervals and have seen my rent growth at 6-7% annually and appreciation of 9-11%.  My Vegas purchase in 1994 had ten years of 12% annual appreciation!!!  But prior to that appreciation was 3-4% but 80% of Vegas wasn't there 10 years prior.  I like to see consistent numbers over at least 3 decades.

arebelspy

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Re: CAP RATES Where did new (and old) investors learn to misuse them?
« Reply #29 on: December 24, 2013, 12:18:06 PM »
My Vegas purchase in 1994 had ten years of 12% annual appreciation!!! 

You're seriously going to talk about appreciation by cherry picking data from a time period that is well known to be a bubble, in the city that is often regarded as the one that was affected the most?  Come on.
We are two former teachers who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and are now settled with two kids.
If you want to know more about us, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.
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honobob

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Re: CAP RATES Where did new (and old) investors learn to misuse them?
« Reply #30 on: December 24, 2013, 12:36:54 PM »
My Vegas purchase in 1994 had ten years of 12% annual appreciation!!! 

You're seriously going to talk about appreciation by cherry picking data from a I'mtime period that is well known to be a bubble, in the city that is often regarded as the one that was affected the most?  Come on.
Arebelspy,  that apology must have drained all the blood from your head.  Please read the entire paragraph. " I like to see consistent numbers over at least 3 decades."  This is what people have pointed out to me.  You seem ready to attack me regardless of what I say.  This started from my very first post!  I clearly was not saying Vegas appreciation rate was 12% other than about a 10 year period.  I stated that before that time it was 3-4%.  There is a stronger argument that 3-4% IS the appreciation rate but I don't have the data to support that so I am only reporting what has happened.  Seriously?
« Last Edit: December 24, 2013, 12:50:06 PM by honobob »

arebelspy

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Re: CAP RATES Where did new (and old) investors learn to misuse them?
« Reply #31 on: December 24, 2013, 02:17:05 PM »
Annoying/frustrating that I spent time digging up an article to rebut your point, but instead of actually discussing the topic you'd rather ignore it for personal attacks, non sequiturs, and irrelevant or wrong information.

I guess the real issue though is that you keep sucking me in with your inflammatory posts. The very definition of a troll.

I'll try to avoid that trap again.

Best of luck to anyone else trying to reason with honobob.
We are two former teachers who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and are now settled with two kids.
If you want to know more about us, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.
We (rarely) blog at AdventuringAlong.com. Check out our Now page to see what we're up to currently.

honobob

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Re: CAP RATES Where did new (and old) investors learn to misuse them?
« Reply #32 on: December 24, 2013, 03:07:50 PM »

I guess the real issue though is that you keep sucking me in with your inflammatory posts.




Exactly!
« Last Edit: December 24, 2013, 03:12:55 PM by honobob »

Another Reader

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Re: CAP RATES Where did new (and old) investors learn to misuse them?
« Reply #33 on: December 24, 2013, 03:18:46 PM »
My suggestion is that folks interested in getting into real estate investing consider Honobob's behavior * before they give his opinions any credence.  Professional folks don't behave like trolls on public forums.

*and his motivation
« Last Edit: December 24, 2013, 03:24:33 PM by Another Reader »

honobob

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Re: CAP RATES Where did new (and old) investors learn to misuse them?
« Reply #34 on: December 24, 2013, 03:38:52 PM »
My suggestion is that folks interested in getting into real estate investing consider Honobob's behavior * before they give his opinions any credence.  Professional folks don't behave like trolls on public forums.

*and his motivation
just because you want to call me a troll because you do not want to be corrected does not make me a troll.  Teach us!  Show us how you have calculated a cap rate on a sfr and made a decision on it.   Failure to participate would seem to reveal you as the real name calling troll.

swick

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Re: CAP RATES Where did new (and old) investors learn to misuse them?
« Reply #35 on: December 24, 2013, 05:05:35 PM »
Locking topic as this has strayed off topic and there have been too many complaints. Happy Holidays everyone.