1. you are willing to put down a 10% - 20% down payment
2. you are willing to break even instead of expecting to have a significant amount of positive cash flow
3. you plan to keep the property for three or more years
4. you are willing to patiently wait for and thoroughly research available properties
5. you are willing to make exploratory offers to conclusively determine the amount of flexibility in a given asking price

• 870 Merlins Way, Harrisonburg, VA
• 880 Merlins Way, Harrisonburg, VA

Cap rates vary over time, as market conditions change.  Here is a brief analysis of current cap rates for single properties in the Harrisonburg area as of May 2008.

1337 Devon Lane, Harrisonburg = 6.5%
3 bedroom, 1.5 bathroom, 1254 SF townhome
Sold for $130,000 in March 2008
Projected rental rate = $900/month
( ($900 per month x 12 months) - ( $328 insurance + $778 taxes + $708 POA + $500 repairs ) ) / $130,000 sale price

1308 Bradley Drive, Harrisonburg = 6.7%
4 bedroom, 2 bathroom, 1352 SF townhome
Sold for $147,900 in January 2008
Rental rate = $100/month
( ($1100 per month x 12 months) - ( $373 insurance + $821 taxes + $1620 POA + $500 repairs ) ) / $147,900 sale price

1014-6 Blue Ridge Drive, Harrisonburg = 6.0%
3 bedroom, 2 bathroom 1108 SF condo
Sold for $103,500 in February 2008
Projected rental rate = $750/month
( ($750 per month x 12 months) - ( $261 insurance + $587 taxes + $1560 POA + $400 repairs ) ) / $103,500 sale price

You can see in the examples above, that current cap rates are in the 6% - 7% range.  However, these cap rates decrease if an owner is paying a management fee for someone else to manage the property for them.  With a management fee of 9%, the cap rates above would be 5.8%, 5.8%, and 5.2% respectively.  The cost analysis above also does not include utilities, advertising, or vacancy.

Related Posts:
Harrisonburg Multi-Family Cap Rates
What Is A Cap Rate?

The "cap rate" or capitalization rate of a property is what I call an an "investment measure."  It is a value that compares the income generated with the acquisition cost of an investment. 

For example, if you purchase an investment property for $160,000 and it generates a net income of $16,000, then the cap rate for the property is 10%. 

To take it a bit further, let's look at this example of a Beacon Hill townhome as an investment property:

Purchase Price:  $160,700

Gross Operating Income:  $10,476
($900/month - 3% vacancy)

Operating Expenses:  $1,479
($949 taxes + $405 insurance + $125 POA dues)

Net Operating Income:  $8,997
($10,476 gross operating income - $1,479 operating expenses)

Capitalization Rate:  5.6%
($8,997 net operating income / $160,700 purchase price)

A few other notes about cap rates:

• The cap rate is independent of financing.  It is not a measure of whether an investment property is a "good opportunity" when your particular financing scenario is included.
• Your analysis of operating expenses sometimes would also include management costs, repairs, utilities and advertising
• The cap rate of a particular property can be helpful, but even more helpful is comparing the cap rate of several properties that you might purchase.

• Terrible Opportunities - where the original amount borrowed (or my estimate of its current balance) is at or above the assessed value. Here is one example, where the original loan was for $231k, and the current assessed value is $157k.
  
• Good Opportunities - where the original amount borrowed (or my estimate of its current balance) is close to, but below, assessed value. Here is one example, where the original loan was for $270k, and the current assessed value is $316k.
  
• Great Opportunities - where the original amount borrowed (or my estimate of its current balance) is well below the assessed value.  Here is one example, where the original loan was $87k, and the current assessed value is $196k.

• Investors who hope to flip foreclosure homes (buy, fix, sell for profit) would likely be interested in the "great opportunities."
• Buyers looking for a home for themselves would likely be interested in the "good opportunities," and certainly the "great opportunities" as well.
• I have yet to meet someone who is interested in the "terrible opportunities," mainly because they aren't likely to be able to buy them at a reasonable price -- the bank will take the houses.