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October 1, 2007
Cap rate to determine price?
Hi all,
When I use a cap rate calcuation to try to value a brownstone with rental income as an investment property, it seems that the prices are WAY out of whack. (Most properties that have listed their units' rental income are coming out with a cap rate around 4-5%). Is this just the way it has always been with brownstones? Does anyone buy these as investment properties (run as rentals) or are they almost always bought to reside in (with rentals alongside to make it more affordable).
Just curious.
Thanks!
Comments
Cap rates are now at 6%. This is historically below trend.
Posted by: guest at October 2, 2007 3:43 AM
Rents add up to considerably less than the cost of carrying the property, which explains why two similar brownstones, one intended for living in it and another for rental would get very different prices when sold.
Posted by: guest at October 2, 2007 10:44 AM
Cap rates don't explicitly take into consideration expected property appreciation. If you think you will sell something for 30% more in 5 years, you need to add that in (of course it could go the other way too). Some investors will gladly suffer the negative carry if they think there is enough of a payday down the road. Cap rates haven't worked since the mid/late 1980s -- which coincides with the start of the property valuation boom. If expectations of falling prices become the norm, cap rates will be more relevant. We aren't there yet and I doubt we ever will again. Plus the alternative uses of a building -- either as a primary residence (or a mix of the primary/rental) makes it more difficult to value pure rental properties on a cap rate basis. As long as the City stays safe and small building/brownstone living is attractive, there will always be alternative uses which are more valuable than (the valuation implied by) a pure rental.
Posted by: guest at October 2, 2007 3:08 PM
The other factor that has not been mentioned is the tax break on interest for residential property.
Posted by: slick at October 2, 2007 8:20 PM
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