• Sale volume is still down from last year (no surprise there), though the gap may be slowly closing.  Jan - March showed 2008 sales 24.71% below 2007.  Jan - April shows 2008 sales 23.38% below 2007.  The gap probably isn't yet statistically significant, but it will be interesting to see what happens when we include May sales as well.
• Prices keep going up, though only at a modest 4.27% over the past year.  This is great compared to some areas that have seen price declines.

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.

Not at all! They are for buyers as well!

1. House is worth $200,000, but listed at $250,000. Buyers try to negotiate 10% off, and offer $225,000. Negotiations fizzle.
2. House is worth $200,000 and listed at $195,000. Buyers try to negotiate 10% off, and offer $175,500. Another buyer comes along and buys the house for $193,000.