Any time a client is thinking of purchasing a 6-plex in downtown Toronto based on these numbers, you can be pretty sure a property bubble has formed:
A 1.7% cap rate is far below what is needed to make this property cashflow.
The only reason I can think of why someone might buy this is the greater fool theory, which works along these lines:
like when you played musical chairs as a little girl or boy—there was always
someone left without a chair when the music stopped. It’s called the greater
fool theory because you believe (irrationally) that there is always someone stupider than you are who’ll buy it for more
next year… until, of course, there isn’t, ie, you run out of fools.
Even with animations, the cap rate only creeps up to 2.2%, viz:
Still completely unacceptable.
So what should someone actually pay for this place? Well, if your target cap rate is, say, 6.4% pa (which is about where it should be or, at a minimum, above 5%), this is easy to calculate–
So a purchase price of around $2.5 million for this 6-plex makes sense.
Not so much.
Bruce M Firestone, PhD
Century 21 Explorer Realty Inc broker
Ottawa Senators founder
Real Estate Investment and Business coach
making impossible possible
postscript: I also refer to this irrational exuberance as a “Toronto sickology.”
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