Multifamily Cap Rate in Different Cities


Rents are high in Socal, too . not just in SF


All are cash cows, Which one you prefer, why?


San Jose Alexander: 5% cap rate

Santa Clara: 3%

San Jose Hester: 6%

The Hester house is not occupied. So its rental number is rather suspect. Also need to factor in a lot of rehab.

I won’t call these cash cows, more like cash donkeys. :slight_smile: Not a lot of meat.


Cap rate? Thought this is called cash on cash return, generically known as gross yield. Cap rate has to deduct all expenses except mortgage interest.


I deducted the expenses reported on mls. So it’s cap rate.


Did MLS account for property management and vacancy? I notice some houses in my neighborhood was not rented out after 3 months… managed by property management and initial asking rent is higher than market… usually ask more than 10% what I have rented out.


IMO, lowest cap rate Santa Clara will turn into pending first as this preferable location than other two.

Hester amounts given are wrong and will not work out 6% cap rate. It has lot of work to bring up.

Alexander ave, even after 174 days not going, seems pricey one.


Do you capitalize the “work to bring up” into the purchase price or treat as expenses for the purpose of computing cap rate?


Desirable = low cap rate
Undesirable = high cap rate

This is true in the same metro area.


As per tax, it is amortized unless you sell it and it goes to amortized expenses. This is the main reason, flippers take big work as they can write off when they sell it.


That’s what I thought too. Therefore we need to deduct amortized expenses of all appliances/ painting/ curtains/ flooring/ … over say 10 years (just an average number, can use exact for each item if you know) and not when the replacement happened. These amortized expenses along with property management and vacancy are likely not accounted in MLS estimate. This omission is why I suspect the estimated cap rate for regions with harsh weather appears to be high.


I think is is smarter from a tax standpoint to deduct these expenses as maintenance costs and move in expenses as you upgrade between tenants…It may lower the advertised cap rate…I think that many areas of the country do have higher maintenance costs…especially Florida and Texas…also vacancy rates are generally highr in high cap areas…Dont believe what a seller tells you…do your own research


Can you do that? IRS has guidelines stipulating things like appliances and curtains/blinds have to be amortized, and services like painting and repairs are treated as maintenance.


I think you can deduct some for upgrades. .not sure on the details…But I think you deduct painting, flooring, cleanup and general items as annual maintenance. …Appliances have to be amortized


I think IRS now allows you to deduct 100% capital investment expense if it’s under $10k. But if you do that, it lowers your cap rate and also make your net rental income lower. I chose to amortize to make my taxable rental income higher so that refinance will be easier.

The tax reform blueprint seems to allow 100% expense of any capital investment. I’m afraid that that would make the net income too low and will make the refinance impossible. That proposal seems to favor cash buyers and discourage mortgaged buyers


Do you have a link to the $10k rule?
I think buyers will be sophisticated enough to figure their own maintenance costs…These numbers are too easliy manipulated to rely solely on the seller…I use a 25% load factor as a rule of thumb…25% of gross for all expenses like taxes, utilities, maintenance, management. …Capital costs I just deduct from appreciation …Additional cost would be additional utilities, if master metered, and regional costs like snow removal…


Turbotax was prompting me for this last year, I chose not to take advantage of it. Will send it out when I find it on google.


You have this section 179 exemption AFAIK


I think it’s 179. This full regulation is not easy to read, but I remember that turbo tax was asking whether your capital investment is under $10k or not. If under $10k, deduct the full amount. If over $10k, need to depreciate over years. I did not try to understand it to the full detail and just give full trust to turbotax. I chose to not deduct immediately since that property was already at a loss and there is no need to reduce my rental income and risk any future refinance.


Here, @manch, you can supposedly calculate the true cost of a Florida home on this website…