I am trying to bid an investment property that works out to 3.5% cap rate. Is this current cap rate or low for south San Jose?
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Not sure about South San Jose in particular. But in prime Bay Area cap rate is usually around 3.5 to 4%. So without knowing any details it’s in the ballpark.
As per internet, Last year cap rate looks higher at 4.5% level, but it came down this year. On any case, with my quote rate, the cap rate works out 3.5%, still do not know whether I will get the contract or not. There is multiple offer situation !
Thank you.
For SFR, 3.5% cap rate is good. For multiple family, it might be too low for a rent controlled city.
With 3.5% cap rate, you are barely cash flow neutral. Assuming 75% loan at 5% rate, you need 3.75% cap rate just to pay interest. Plus principal, you will be negative
You are right. Planning with 30% down payment at 5%. With 3.5% cap, I get principal negative. There are ARM with less rate, but I like 30 fixed. Since I am having positive cash flow in another rental, able to manage principal negative to some extend. It may need few years to get proper cash flow.
When I was searching bay area cap rate, I got this info !
“The barriers to entry in the Bay Area place those holding real estate assets here in an enviable position. A recent sale (2016) of the 95,000 square-foot building in Santa Clara located at 2435 Lafayette Street is one such example. The sale, which closed on June 24th for $25.5 million at an effective 5.33 cap rate, gave the sellers a very nice return in less than six years they had owned it.”
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It’s true Home Depot probably can’t find another piece of land to move to that’s close to that site. But the flip side is that there aren’t many big box retailers left that can fill that space. I am not sure they can put an office park there. The surrounding area doesn’t give you that high tech vibe. Seller is smart to lock in the gain.
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