Is the cap rate recommended for a portfolio purchase of 20 are more properties?
I am trying to determine the best analysis for the following mixed use residential purchase:
22 Residential Properties
Occupancy Rate= 98%
Gross Ann Rent= $179,340
Operating Expense = $70,900
Thanks for reaching out to us, Donzell.
You can use the cap rate, but I wouldn’t stop there. There is no one-size-fits-all or one best formula to analyze whether an investment is a good or bad deal, and most investors will use a variety of calculations to try to get a good picture.
Check out our article, “Cap Rate vs. ROI vs. Cash-on-Cash Return” https://fitsmallbusiness.com/cap-rate-vs-roi-vs-cash-on-cash-returns/
You also want to consider the location and types of property, as well as the strength of the tenants.
Some other questions to consider: Do current rents reflect the current market? Will you need to do any capital improvements? What is the vacancy rate in the region? Is there substantial deferred maintenance?
The estimated value really doesn’t give you much since you’re buying and holding and this will fluctuate with the market, so you don’t want to focus on equity, just positive cash flow.
You may have done all this already, but if not, you want to look at several years of the financial statements, if they are available. That will give you some good intel as to how the investment has performed historically, and you can see if there have been any problems, unrealized income, unnecessary expenses, and when rents were last increased.
Hope this helps!