from reading about it, i think cap rate is much more useful with a commercial rental property with multiple units, where you actually get a substantial rate of income. i've got two questions:
1. how is this even possible in the GTA (including burbs) area? a common hypothetical example i read about is, you bought a $100,000 and your NOI is $10,000 per year, that gives you a cap rate of 10%. i guess $10,000 is kind of reasonable, about $833 per month....so if you own a few units, might be able to scrape that together after expenses. but where can anyone find a multiple unit rental for $100,000??? such a property would have to be upwards of $1,000,000, which for the same NOI, drops your cap rate to 1%. This seems more realistic, but pretty dismal, no? is the cap rate even a good measure today with RE prices here, or is there simply no where in the area that works as a rental property.
now i'm sure i'll get a response saying how this is why property managers are selling and getting out of the rental business cause it doesn't make money...one alternative is that housing prices must fall. maybe. and furthermore, this could take many many years, who knows. does that mean people just can't make money on rental properties and will have to wait it out or give up OR* does it mean there needs to be some kinda paradigm shift, to account for the high prices, to somehow find a way to make rentals profitable again even at higher prices?
2. is the cap rate at all appropriate for residential rentals, for instance, 1 unit in a condo. now your expenses don't get shared among several renters (i.e. potential lines of income), which reduces the NOI. in fact...unless you put down a substantial down payment (and i imagine for investment properties, you want to put down as little as possible to be profitable), your NOI is going to be basically nothing.
let's take a 250,000 condo for example...kinda typical just north of GTA. put down 20% or 50,000, get a mortgage for 200,000. stuck some numbers into the mortgage calculator at canequity (5 year term, 3.29% fixed..yah it'll probably go up, 25/35 amort), and this gives you a monthly payment of about 1000 per month at 25 years, and 800 per month at 35 years.
aside: does NOI include property tax?
anyway, take 1000 mortgage, plus about 300 in condo fees, and you're basically running into the current average rental prices of about 1400 per month. this leaves you with an NOI of 1200 (25 years amort) or 3600 (35 amort). this then gives a cap rate of 1200/250,000 = 0.5% or 3600/250,000 = 1.4%. this means it could take you 200 years to get your money back!! (i'm laughing and crying at the absurdity and reality of the situation) does this even make sense, and i didn't even include for maintenance, legal fees, and vacancy...
can someone who's done this give me a real life example of a rental property (single or multi-unit) that makes money, the cap rate, and the year in which it was purchased. also, my understanding is that cap rate is calculated using the current value of the property, not the purchase price.
with these numbers, i feel like NO rental units make money at all, unless it's VERY cheap, and rent is on par with other areas that are nicer. again, a real life example is very much appreciated!