Could you continue the topic of Cap rate and ROI from your 2015 Blog?

Category: Investing

 

Hi David, 

Could you continue the topic of Cap rate and ROI from your 2015 Blog?

As cap rate drops,  investors pray for continued appreciation, thus less enticing .

I have a current example of a property I am crunching the numbers ,and it doesn’t make sense.

 


 

Hi Mark,
I’ll put this topic in the queue!

You’re on to something here for sure, and maybe it doesn’t get as much attention as it’s not a sexy topic.

But I’ve witnessed cap rates drop dramatically over the last few years.

We have a running joke in my office “zero percent cap rate!”

It’s a cynical, sarcastic response to the discussion of any investment property in Toronto, since the cap rates on freeholds have dropped so low – many below 3%, that we’re not too far away from marketing properties on MLS and saying “sought after, zero percent cap rate.”

5% used to be the threshold, and then in 2015, as you point out, cap rates on multi-unit freehold started dropping, and went below 4%!

Last year I tried to sell a 5-unit property on Palmerston, that my clients were willing to buy at about a 3.85% cap rate, and the property sold for about $300,000 more than we had offered (somewhere around $1.6M I believe), and the new owner settled for a 2.91% cap.

The higher cap rates in this market, believe it or not, are on small, 1-bedroom condos.  But even those have dropped too.

In 2015, I was selling $280,000 condos that leased for $1,600.  Then last year, they were $310,000 and $1,650.  Now they’re $340,000, and still $1,650.

I agree that on a cash flow basis, these don’t make sense.

But if they continue to appreciate 15% per year, then who cares about cap rates and cash flow!
David.

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