Vancouver Apartment Buildings

I read a report from a Commercial Realtor today. I've subscribe to their report for free for several years now. Today, I've found the cap rate for apartment buildings in Vancouver has finally increased.

It used to be around 2% last year when the market is hot. 2% cap rate is not very good. Now it is about 5 or 6%. This is an indication that the purchase price has come down a bit in Vancouver apartment buildings.

The investment properties I have are around 20% cap rate which is calculated by Net Operating Income (NOI) divided by the Purchase Price. NOI is calculated by annual gross income minus annual expenses.

A fast and simple way to look at cap rate is to use it to see if the investment makes sense.

For emample, for a property with 20% cap rate, the interest rate on borrowed money is say 7%, so 20 minus 7 is 13. That means I still have 13% in my pocket after mortage payment and expenses. For a 2% cap rate, in order to have positive cash flow, I need to find loans with less than 2% interest...extremely unlikely unless you have a rich aunt who pratically will lend you the money for free.

So to buy a investment property with cap rate of 2% and if I can only get mortgage about 7%, that means I'll have negative cash flow every months. This strategy is okay if you have a lot of money or are investing for appreciation. But I personally think apartment buildings are for cash flow.

A general rule of thumb is to find investment property with 2-3% higher cap rate than your interest on the loan.