Rates and RE Prices


#21

Cap rate is (annual rent - property tax - maintenance expense - management expense) / current-market-value.

Mortgage is not a factor.

Use current market value, not the purchase price.


#22

management refers to HOA not property manager.
only making decision then use market value, once bought, we use purchase price.


#23

Have to use current market price. If you use the price from 30 years ago, cap rate would be though the roof


#24

Doubt it. Did you do any computation yet? You’re assuming other expenses don’t have inflation. For example, replacing roof may cost $10k for crappy roof, 10 years later could be $15k.


#25

Are you using the purchase price or current market price? There’s a huge difference


#26

This is the way

How_to_calculate_cap_rate


#27

Why use current market price? I didn’t buy those houses at current market price and also paying much less property taxes than I would if I were to buy at current market price.


#28

I keep $100/month/house flat rate on Reserves cover long+short term repairs as bigger expenses are amortized by taxes.


#29

Standard definition? The property management means HOA right, not the property management company that one employs to help you do PM.


#30

I use the purchase price. If selling use the sale price and the expected property tax.


#31

This is the standard definition

Cap rate = Net operating income / Current market value (Sales price) of the asset

If you bought a house for 30k in 1965 and now renting for 4k a month, is your cap rate 150%? Cap rate is used to compare with alternative investments at the time of calculation.

https://economictimes.indiatimes.com/definition/capitalization-rate


#32

Yes you do have a point. Cap rate needs to take into account the opportunity cost for not selling. That 1965 house you bought should have a low cap rate because it’s telling you that it more worthwhile to sell it than keep holding on to it :wink:


#33

yes. If the 10 year yield is 10% and your 1965 purchase only delivers 1.5% cap rate at today’s price, it gives information to act upon. But if you thought your cap rate is really 150%, you’ll never consider other alternatives.

But if you plan to never sell, you don’t need to calculate cap rate after purchase.


#34

Exactly. Is why I keep saying use cashflow to compute whether it is worthwhile to invest because you’re not comparing alternatives. Frankly, I don’t care about cap rate much, because you guys keep talking about it, I just talk about it. IMHO, cashflow is the real deal.


#35

For me, cash flow is not the real deal. Appreciation is.


#36

The problem with using current value, is first it is hard to know. Second if you sell the tax on a 1965 property will be 35% state and federal so the after tax cap rate is what really counts unless you can 1031


#37

Clearly didn’t do your computation. Are you talking about yield or cap rate? The expenses would be more than $30k. You can get $4k rent for an old house built in 1965, pulling my legs. You probably need to re-build or do a thorough re-modeling to get that rent. In fact, nobody would rent that house if no re-modeling… I guarantee you that.


#38

How can you have a 30k expense when property tax is only $1000?


#39

Don’t keep using theoretical numbers, use a real house. Theoretically is BS.


#40

None of us own a 1965 purchased property so the comparison means little. If you own property past the depreciation time, it makes sense to 1031 out. Or at least rifi into better yield investments