Debbie, I know for sure that you can buy some duplexes in the bay area (especially closer to some parts of Oakland) with the numbers I presented earlier, because I've seen (and ran the numbers for) some of those deals. However, it will probably be much easier for you to purchase a 4-plex that will yield similar numbers.
The key to buying a property right has less to do with buying it cheaply; rather, the key is to understand how the numbers work and what they mean--whether you use third-party software or write your own software as I do. The point is that your purchase price--even if you were to obtain a property for free (legally)--won't matter if the numbers don't work. Again, Michael is correct: "[there] are so many ways to look at the numbers. . . ."
Additionally, don't let the sticker price scare you. There are lots of ways to finance the purchase of an investment property: seller financing, conventional (commercial and residential) financing, private money, partnerships, etc. Each method has its pros and cons, and you could even use 2 or more of them together. The most difficult part of buying an investment property is finding and structuring the deal itself. if you put together the right kind of deal, then the money will come.
Have you considered a free consultation?
Second, although cap rate (NOI/[purchase price]) is important, it's kind of meaningless to discuss cap rate without also discussing the interest rate of the loan (assuming you intend to finance your purchase). Stated another way, one should use the cap rate, NOI, and DCR (NOI/[12 * mortgage]) to compare apples to apples for rentals (aka income properties). Nevertheless, Michael was correct that many investors use cap rates (and the ROI) to compare different classes of investments.
Third, I'll borrow Michael's 3/2 rent (1900--which I also validated via zilpy.com) to use in some calculations. Although Michael mentioned earlier that he likes to purchase properties minimally at 8% cap rates, I prefer to purchase them minimally at 10% cap rates. Additionally, I also structure all of my deals minimally to have a DCR of 1.2 (usually at least 1.4).
(where 7.41 = [12 months]*[.95 occupancy]*.65 [assumes 35% operating expenses])
NOI = 7.41*1900*2 = 28158
purchase price (at 10% cap rate) = NOI/.1 = 281580
(assuming 30-year fixed at 6% APR at 80% LTV with cap rate of 10%)
mortgage = (.8*NOI/.1)*(.06/12)/(1-pow(1+.06/12, -360)) is roughly 1350.57
DCR = NOI/(12*mortgage) is roughly 1.74
monthly pre-tax cash-flow = (DCR-1)*mortgage is roughly 995.93
purchase price (at 8% cap rate) = NOI/.08 = 351975
(assuming 30-year fixed at 6% APR at 80% LTV with cap rate of 8%)
mortgage = (.8*NOI/.08)*(.06/12)/(1-pow(1+.06/12, -360)) is roughly 1688.21
DCR = NOI/(12*mortgage) is roughly 1.39
monthly pre-tax cash-flow = (DCR-1)*mortgage is roughly 658.29
Glen also made a pretty good point about considering the cost for any immediate repairs (required to get the property into rentable condition), but that will mainly effect your cash on cash (or ROI), and they need to be added to the operating expenses.
Rental prices are very good still. I would venture to estimate only 1 in 10 properties stays vacant over 6 weeks. Those are usually condition challenged. :)
With the investment dollars you are considering...Would you consider different options/locations?
When you are comparing properties for investment , cap rate is a key indicator of the performance you can expect from your investment. There are software programs available that cover a number of the factors you will want to know. Some cover more than others so I created one that meets my criteria.
Trying to figure future returns (appreciation) would be another equation and would need to addressed with imperical data derived from historical sales and trends. Maybe more of an art than science.
annual net operating income / cost (or value) = capitalization rate
$100,000 / $1,000,000 = 0.10 = 10%
All things equal (ie condition of property) the higher cap rate offers the higher return. It's a formula you can use to compare different buildings to see which is the better investment. If the 2 bed 1 bath unit has a higher cap rate then the 3/2 that may be the better investment. You still need to factor in repairs and vacancies potential changes in rent down the road etc. If you knew you could invest your money risk free in a bank for 12% that would be a better investment.
PS It will most likely be a very long time before you get 12% at the bank :)
Also, when you say it shows a better return do you mean in the long run (including appreciation) or do you mean in terms of rental income?
Here is a hint: 3/2 rents are appx. 1900-2200 per month...2/2 rents are appx. 1200-1600 per month and finally 2/1 rents are 1100-1400per month. These are best used today through Spring and will usually see a change after Spring. These ranges are based on condition for their respective upsides.
Have a Happy Easter weekend!
Keep up your hard work! It will pay off. Pencil the numbers as many ways as you can.