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With a cap rate of 6.8 percent — below average — New York City actually is a good place to rent, if you can afford to live there at all.
updated 11/4/2009 7:18:36 AM ET 2009-11-04T12:18:36

Relocating? Then you're probably worried about whether you should rent in your new hometown or buy while prices are down.

Before doing either, it pays to understand your "capitalization rates." When you visit a desirable rental apartment, determine its net rent — that's annual rent minus the property taxes, condo fees, insurance and routine fix-up costs you'd have to cover if you owned the condo or one like it.

Divide the net rent by the purchase price for an equivalent home.

The purpose of this slightly laborious exercise? To discover before you potentially make the biggest purchase of your life how much financial sense it makes.

Generally, it's a good idea to rent where cap rates are low (less than the current 3.3 percent tax-free yield on 10-year high-grade municipal bonds, for instance) and to buy in places where cap rates are high.

It's also worth checking the average local cap rates on purchases of large, workaday commercial apartment complexes.

Properties like these trade at wholesale prices, and their investment returns will always be a few percentage points higher than the rates the rest of us get when we shop for one-off condos in the retail market. (The current national average cap rate for buyers of big apartment properties is 7.5 percent.)

Nonetheless, commercial cap rates are a bellwether of how good or bad the local market is for buyers of smaller condos and single-family homes.

Green Street Advisors, a Newport Beach, Calif., research outfit that follows commercial landlords, identified six cities with below-average cap rates (potentially best for renters) and three where cap rates are above average (aka, buyers' markets).

© 2012


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