# Cap rates on rental properties



## Ethan (Aug 8, 2010)

What are cap rates like in your area, and do you find these cap rates sufficient to justify your investment? 

In my area, I find cap rates to be 3% on condos and 4-5% on houses. On a rental basis I find homes in my area to be way overvalued. I equate a 5% cap rate to buying shares in a company whose net income + interest is equal to 5% of the market cap. I can find hundreds of Canadian stocks that meet these parameters, but I can't find many rental properties that will do this. If you have enough money, or if you are part of an investment group, you can buy apartment buildings or commercial properties which have higher cap rates. To me, investing in individual rental properties in my market does not make sense when I can easily invest in TSX traded equities.


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## sprocket1200 (Aug 21, 2009)

bingo


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## Mall Guy (Sep 14, 2011)

An end user (in this case a home buyer, but its the same in industrial, retail, etc.) will always be willing to pay more than an investor . . . emotions come into play . . . get your 6% and real estate exposure with a high quality REIT, or primary residence with a high quality apartment . . . I could get roughly 3-4% by renting my condo, but am getting closer 9% for the lower level apartment in my house.


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## kcowan (Jul 1, 2010)

Mall Guy said:


> I could get roughly 3-4% by renting my condo, but am getting closer 9% for the lower level apartment in my house.


What are you basing the cap rate on in your basement? IOW how did you allocate expenses?


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## Berubeland (Sep 6, 2009)

Maybe it's a "bloft" lol 

This is a word I just learned yesterday...http://www.urbandictionary.com/define.php?term=bloft

Sigh...


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## Mall Guy (Sep 14, 2011)

kcowan said:


> What are you basing the cap rate on in your basement? IOW how did you allocate expenses?


yes, it could be a somewhat arbitrary allocation, but the bloft (love that . . . watch for it on a kijiji near you . . . well probably no where near you actually) but the rental is a 3rd of the house, paid $300k so rentals cost is $100k, and I get $1000/mo in rent (they pay utilities, but I supply cable off my feed). So expenses are water, hot water, mortgage interest, lawn and snow . . . all tax deductible against income. My point was I was happy to buy the property, live in it, and be very choosy about who I rent to . . . rental pays for the condo in the city (live in a small town). I doubt I would get the same return renting the condo . . .


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## kcowan (Jul 1, 2010)

Mall Guy said:


> but the rental is a 3rd of the house, paid $300k so rentals cost is $100k, and I get $1000/mo in rent (they pay utilities, but I supply cable off my feed). So expenses are water, hot water, mortgage interest, lawn and snow . . . all tax deductible against income. . . .


OK that sounds like a reasonable assumption. The deduction against income sounds aggressive but so long as it works for you, that is fine...


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## Mall Guy (Sep 14, 2011)

. . . to clarify, I deduct 1/3 of those expenses . . .


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## kcowan (Jul 1, 2010)

Mall Guy said:


> . . . to clarify, I deduct 1/3 of those expenses . . .


That is certainly defendable. But I think you could justify different splits on selected utilities. How much of your mortgage interest is allocated to the suite really? Example, you paid 25% more for a finished suite....


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## newfoundlander (Nov 26, 2011)

Appologies if I've missed this covered somewhere else, but are there limits as to how much of the mortgage (read Interest expense) that can be allocated to the rented flat in a case similar to what Mall Guy has presented?

To put it in numbers: $300k house, of which 1/3 (by area??) or $100k is the rented flat, $200k mortgage - is the deductible interest limited to 1/3 of the total (based on overall split) or can I deem the flat to be 100% financed and deduct 1/2 the total interest expense.

Thanks
NFLDer


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## marina628 (Dec 14, 2010)

I just bought a 1 bedroom 1 bathroom condo in Orlando 670sq for $29,000 , my net after condo fees ,taxes and insurance is $475USD a month.


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## Eclectic12 (Oct 20, 2010)

newfoundlander said:


> Appologies if I've missed this covered somewhere else, but are there limits as to how much of the mortgage (read Interest expense) that can be allocated to the rented flat in a case similar to what Mall Guy has presented? ...


As I recall from the tax book I had years ago, for a split use rental - the two suggested methods were number of rooms as a quick & dirty estimate of square footage or the safer, actual square footage.

This blog uses a 50/50 split in it's example, where the square footage in your example would make the shared expense 1/3, of which the mortgage is a shared expense, similar to the insurance that is quoted.
http://blog.turbotax.ca/what-expenses-can-you-claim-on-a-rental-property-part-3/


Cheers


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## bleon (Sep 18, 2013)

*Cap Rates have gone down! But there are still some deals!*



Ethan said:


> What are cap rates like in your area, and do you find these cap rates sufficient to justify your investment?
> 
> In my area, I find cap rates to be 3% on condos and 4-5% on houses. On a rental basis I find homes in my area to be way overvalued. I equate a 5% cap rate to buying shares in a company whose net income + interest is equal to 5% of the market cap. I can find hundreds of Canadian stocks that meet these parameters, but I can't find many rental properties that will do this. If you have enough money, or if you are part of an investment group, you can buy apartment buildings or commercial properties which have higher cap rates. To me, investing in individual rental properties in my market does not make sense when I can easily invest in TSX traded equities.


Ethan,

I am in Florida, and specialize in commercial rentals (Multifamily, Bulk Condos, etc.) and ever since 2008 Cap rates have gone done considerably from an unheard 10-11% to the market median 5 1/2 -6%. I am seeing 3-4% cap properties for sale now which tells me the market is over-heating.

However, there are still deals out there. Consider your time-frame (1-2yr flip > 7% cap, etc.) Ask questions.


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