Need advice - Posted by First Deal

Posted by David Butler on January 14, 2004 at 15:01:37:

Helll First Deal,

That’s actually a real estate question better suited for the real estate forum (Main Forum) on this site, rather than here in the Cash Flow Forum, which is about notes. But there are a couple of factors I’ll share with you here.

The ratio you describe (or “Cap Rate”), offers three measures that apply in every income property investment…

  1. the “income approach” used by appraisers to help reconcile a specifi income property’s market value;

  2. the nonspecific “going rate” for similar type properties in a given similar area;

  3. a function of what an individual investor demands for his own investments.

As to your question…

Question: What ratio of NOI to Purchase Price should I be looking for?

Best answer here is “I don’t know”!

That is entirely subjective in the final anaylsis, based purely on you and your objectives, risk tolerance, alternative investment opportunities, etc.

Something to keep in mind though, is that this web site is about finding deals that earn you a better return than what is generally available in the general retail market in a given area; and/or creative techniques for structuring a property purchase in such a way as to make it so.

You’ll want to begin learning about that, and a good start would be in that Forum, as well as browsing through the online bookstore here, and looking through the course offerings on various methods of profitable creative real estate investing techniques.

Best wishes for your success, and Many Happy Returns!

David P. Butler

Need advice - Posted by First Deal

Posted by First Deal on January 13, 2004 at 15:23:43:

I’m looking to buy my first rental property. I’ve run numbers on a few deals including rentals in NYC, Hawaii, NJ shore, Florida, & Minneapolis.

Question: What ratio of NOI to Purchase Price should I be looking for? Almost all deals I’m looking at are coming in under 5%. Around 5.5% it looks like I’m breaking even (on cashflows) when putting 20% down (using a 30-year at 5.625%). Anyhow, this seems really low. Essentially this means if I bought these deals in CASH, I’d only be netting around a 5% return. Is that right in this market? What was it like 5 years ago? 10 years ago? Heck, at those returns, I’d rather bet on the stock market. Is this NOI/Purchase Price the same as Cap Rate?

thanks for any help.