Without truly knowing if the market has hit bottom or how fast recovery will come, many buyers are sitting on sidelines waiting, and watching. Even though some economic indicators (residential loan delinquency, unemployment, MSI) point that we are in a recovery period, as some economists suggested, it will be a slow one. The market psychology is keeping many from purchasing leaving investors leveraging negotiations.
Many investors use various valuation tools for measuring investment opportunities. Capitalization rate (CAP) is fairly common for measuring the ratio between the net operating income and its acquisition cost. Cap rates are usually calculated by the net income divided by cost (or value) returning a percentage. It is a measure of how fast an investment will pay for itself.
Typically properties that have lower risk have a lower cap rate than their counterparts in areas that present higher risk. However the dynamics for what was previously acceptable is slightly changing as well in the new markets
With buyers delaying their purchase, and previous homeowner in need of housing, it has pushed up rental demand and even rates in Class A areas, and moderately in Class B neighborhoods.
With stronger rental income and demand, many investors are considering these areas, except that very few cut-rate distressed sales come to market in these neighborhoods. Consider that the price of one potential investment in a desirable area could alternately equal the purchase of several distressed properties in other areas.
Investors willing to take the risk are hedging their risk by turning their investments into voucher homes. However, whether we are in recovery or not, prices will continue to remain somewhat flat, or even continue on a slow decline if buyer mentality does not change and as banks slowly make available properties from the shadow inventory. Some of these cash producing investments can then turn around and net losses even if sold years from now as some areas take longer to stabilize.
Even if adjusting for price change percentages, since many areas have performed poorly, it is still hard determining which areas will make it out first. Q1 2011 data shows that Chicago’s Loop fell -37% from the year before, while Logan Square stayed at 0% and West Garfield Park is up 106%.
Investors will need to look beyond the numbers and some basic factors, some of which created the initial demand for many of Chicago’s real estate. With the buyers that are on the market looking for primary residency, it’s gone back to basics: vicinity to transportation, neighborhood amenities, walkability and cost.
Sherwin is a REALTOR® in the Chicago & Suburban area with @properties. Questions can be forwarded to Sherwin Sucaldito. Originally posted at Realty Evolved
Site Tags: investment, Cap Rates, landlord
Sherwin L. Sucaldito, REALTOR®, GREEN, ABR, CRPM
@properties
The Institute of Luxury Home Marketing
Green REsource Council, GREEN
Accredited Buyer’s Representative , ABR
Certified Residential Property Manager, CRPM
2 thoughts on “Cappin’ It Off”
Hi, I’m wanting to know the cap rate for the auburn-gresham area ib chicago; could you help me try to determine that? Thank you.
Hard to give a general estimate for the overall neighborhood due to prices of properties which consist a lot of REO and short sales.
Estimating the approx value of the building, units and rental, you are roughly looking at 8/9%+
You can contact me directly if you would like to discuss further in detail.