Cap Rate Vs IRR For Delray Beach Investors

Are you weighing a Delray Beach condo or townhome as a rental investment and trying to decide if cap rate or IRR should guide your offer? You are not alone. Between HOA fees, insurance, and seasonality, the right metric can change your view of a deal. In this guide, you will learn what cap rate and IRR mean, how they work in Delray specifically, and how to use them together to make clearer, faster decisions. Let’s dive in.

Cap rate vs IRR: what they mean

Cap rate and IRR both measure return, but they answer different questions.

• Cap rate: A snapshot of unlevered yield based on today’s income. It ignores financing and timing.
  • Formula: Cap Rate = NOI ÷ Purchase Price.
• Internal Rate of Return (IRR): A time-based return that includes leverage and an assumed sale at the end of your hold. It reflects annual cash flows plus exit proceeds.
  • Concept: IRR is the discount rate that sets the present value of all cash flows equal to your initial equity.
• Cash-on-cash return: A simple cash yield on your actual cash invested after debt service.
  • Formula: CoC = Annual Cash Flow After Debt ÷ Total Cash Invested.

Supporting definitions you will use:

• Net Operating Income (NOI): Effective rent plus other income, minus operating expenses like HOA, taxes, insurance, management, maintenance, utilities paid by owner, and reserves.
  • Simple formula: NOI = Gross Scheduled Rent × (1 − Vacancy Rate) + Other Income − Operating Expenses.
• Exit price modeling: Sale price at exit is commonly estimated as NOI at sale divided by an exit cap rate.

Key takeaway: Use cap rate for quick, apples-to-apples comparisons of similar assets in the same submarket. Use IRR to evaluate a specific deal over time with leverage, rent growth, and exit assumptions.

Delray Beach factors that move returns

Delray sits within a high-demand coastal corridor. That demand supports rent, but expenses can be significant.

• Rents: Coastal and downtown locations near Atlantic Avenue typically command a premium over west Delray. Shorter-term and furnished rentals can push gross rent higher, but come with variable occupancy, higher turnover, platform fees, and regulatory risk. Always confirm street-level comps before you underwrite.
• Typical rent ranges to validate with current comps:
  • 1-bedroom condos near Atlantic Avenue or the beach: roughly $1,800 to $3,000 per month depending on proximity and condition.
  • 2-bedroom condos or townhomes: roughly $2,200 to $4,500 per month.
  • 3-bedroom townhomes or inland single-family style rentals: roughly $3,000 to $6,000 per month.
    These are illustrative. Verify with current listings and property manager data.
• HOA fees: Condos with amenities often run $400 to $1,200 or more per month. Townhome HOAs are often lower, around $150 to $500 per month. HOA is an operating expense that directly reduces NOI, cap rate, and cash-on-cash.
• Property taxes: Investment properties in Palm Beach County do not receive a homestead exemption. Effective rates often fall around 0.8 to 1.5 percent of market value, and special assessments may apply. Underwrite the parcel’s current assessment and millage rates.
• Insurance: Windstorm, property, and flood can be costly and rising. Some carriers limit coastal coverage or impose higher deductibles. If the property is in a FEMA flood zone and you use a federally backed loan, flood insurance is required. Expect insurance costs to pressure NOI.
• Seasonality and vacancy: Winter peaks support seasonal demand. Long-term leases smooth cash flow but may produce lower average rent than short-term rentals. Always check local short-term rental rules and licensing if you plan to go that route.

Submarket color:

• Downtown and beachside: Premium rents, higher prices, lower cap rates, stronger short-term interest if permitted. HOA and insurance are often higher.
• Pineapple Grove and areas west of I-95: Generally lower entry prices and potentially higher cap rates, with lower absolute rents and different demand patterns.
• East of I-95 outside the core: Mixed condo and townhome inventory with varied HOA structures.

Which metric should you use when?

• Use cap rate when you want a quick snapshot of income yield and to compare similar properties in the same location. Low cap rates under 3 to 4 percent typically signal reliance on appreciation, tax benefits, or short-term rental premiums.
• Use IRR when you plan to finance, renovate, or when your hold period and exit assumptions matter. IRR captures leverage, rent growth, expense growth, and exit cap rate. Small changes in exit cap rate can move IRR significantly.
• Use cash-on-cash when current cash yield is your priority. It helps you judge near-term liquidity under your actual loan terms.

Practical target ranges to consider:

• Conservative income investor: aim for post-finance cash-on-cash of roughly 6 to 8 percent, acknowledging that many coastal condos will run lower unless you pay all cash or buy at a discount.
• Value-add investor: target at least 8 to 12 percent IRR for moderate risk, higher for more aggressive plans. Always test exit cap rates 50 to 100 basis points higher than your base case.

Worked examples: condo vs townhome

Below are two illustrative scenarios for Delray. Replace inputs with live comps and quotes before making offers.

Example 1: 2-bedroom condo near downtown (mid-range HOA)

Assumptions:

• Purchase price: $550,000
• Monthly rent: $3,000
• Vacancy: 6 percent
• Monthly HOA: $700
• Annual taxes: 1.2 percent of price = $6,600
• Annual insurance: $2,400
• Management: 8 percent of effective rent
• Repairs and reserves: 5 percent of effective rent

Calculations:

• Gross annual rent: $3,000 × 12 = $36,000
• Effective rent after 6 percent vacancy: $36,000 × 0.94 = $33,840
• Operating expenses:
  • HOA: $700 × 12 = $8,400
  • Taxes: $6,600
  • Insurance: $2,400
  • Management: 8 percent of $33,840 ≈ $2,707
  • Repairs and reserves: 5 percent of $33,840 ≈ $1,692
  • Total operating expenses ≈ $22,499
• NOI: $33,840 − $22,499 = $11,341
• Cap rate: $11,341 ÷ $550,000 ≈ 2.06 percent

With financing:

• 25 percent down ($137,500), loan $412,500 at 6.5 percent, 30-year amortization
• Annual debt service ≈ $31,666
• Annual cash flow after debt: $11,341 − $31,666 ≈ −$20,325
• Cash-on-cash: −$20,325 ÷ $137,500 ≈ −14.8 percent

IRR note: With 2 percent rent growth, 3 percent expense growth, a 5-year hold, and a 5 percent exit cap, IRR will be highly sensitive to the exit price. Given today’s low NOI and significant debt service, returns are likely low or negative without substantial appreciation or faster rent growth.

Takeaway: HOA, taxes, and insurance can compress cap rate and turn financed coastal condos into negative cash flow.

Example 2: 3-bedroom townhome inland (lower HOA)

Assumptions:

• Purchase price: $450,000
• Monthly rent: $3,600
• Vacancy: 6 percent
• Monthly HOA: $250
• Annual taxes: 1.2 percent = $5,400
• Insurance: $2,000
• Management: 8 percent
• Repairs and reserves: 6 percent

Calculations:

• Gross annual rent: $3,600 × 12 = $43,200
• Effective rent after vacancy: $43,200 × 0.94 = $40,608
• Operating expenses:
  • HOA: $250 × 12 = $3,000
  • Taxes: $5,400
  • Insurance: $2,000
  • Management: 8 percent of $40,608 ≈ $3,249
  • Repairs and reserves: 6 percent of $40,608 ≈ $2,436
  • Total operating expenses ≈ $16,085
• NOI: $40,608 − $16,085 = $24,523
• Cap rate: $24,523 ÷ $450,000 ≈ 5.45 percent

With financing:

• 25 percent down ($112,500), loan $337,500 at 6.5 percent, 30-year amortization
• Annual debt service ≈ $25,916
• Annual cash flow after debt: $24,523 − $25,916 ≈ −$1,393
• Cash-on-cash: −$1,393 ÷ $112,500 ≈ −1.24 percent

IRR note: With modest 3 percent rent growth and an exit cap of 5.5 percent after 5 years, IRR can land in a positive single- to low double-digit range, depending on the actual exit price and growth achieved. Lower HOA meaningfully improves both cap rate and potential IRR.

Sensitivity: simple rules of thumb

• Rent decline: A 10 percent rent drop can quickly erase thin cash flow. In Example 2, that shift pushes NOI down enough to deepen negative cash flow. Stress test seasonal and off-season occupancy if you plan short-term rentals.
• HOA increases: A $100 per month HOA increase reduces NOI by $1,200 per year. On low-cap condos, this can push cash-on-cash and IRR meaningfully lower.
• Exit cap rate risk: If the market softens and exit cap rates rise by 50 to 100 basis points, your sale price falls materially. With low entry cap rates, small cap changes create large value swings.

Practical modeling inputs to build into your calculator:

• Purchase price
• Expected monthly rent and other income
• Vacancy rate
• Operating expenses: HOA, taxes, insurance, management, maintenance, utilities paid by owner, reserves
• Financing terms: loan amount, interest rate, amortization
• Annual rent and expense growth
• Hold period and exit cap rate

A quick underwriting checklist

• Request the current HOA budget and reserve status, plus any special assessments history and upcoming assessments.
• Verify insurance availability and premiums for the building and unit, including windstorm and flood when applicable.
• Pull recent rent comps from local listings and property managers. Confirm furnished vs unfurnished premiums and realistic vacancy.
• Confirm short-term rental rules, registration, and enforcement if you plan seasonal or STR income.
• Estimate vacancy realistically: 6 to 10 percent for stabilized long-term rentals in many Florida markets, higher if you rely on off-season STR demand.
• Model three scenarios: Base, Downside with a 10 percent rent hit or +100 bps exit cap, and Upside. Track cap rate, cash-on-cash, and IRR in each case.

How to decide between cap rate and IRR in Delray

• If you are choosing between two coastal condos with similar HOA and finish, cap rate is a clean tie-breaker for unlevered yield.
• If you plan to finance, renovate, or reposition a unit for furnished or seasonal leasing, IRR is the better decision tool. It captures your plan, timing, and exit risk.
• If your priority is current income, pay special attention to cash-on-cash under your actual loan terms. Cap rate alone can be misleading.

How we help Delray investors

Delray is a nuanced market where HOA structure, insurance, and exit assumptions often matter more than headline rent. You deserve a local, data-driven partner who can source the right inventory, validate numbers with real comps, and help you stress test risk.

Our team pairs neighborhood expertise with curated access across Palm Beach County. We can connect you with trusted property managers, insurance contacts, and building-level insights so your underwriting reflects real operating conditions, not assumptions. When you are ready to compare options side by side, we will help you weigh cap rate for today’s yield against IRR for your hold strategy.

Ready to evaluate a specific condo or townhome with clear numbers and a tailored plan? Request a private consultation with The Buchbinder Group.

FAQs

What is the difference between cap rate and IRR for Delray rentals?

• Cap rate measures today’s unlevered income yield from NOI, while IRR measures your time-based return with leverage and an assumed sale.

How do HOA fees affect cap rate and IRR in Delray Beach?

• HOA is an operating expense that reduces NOI, which lowers cap rate and can drag cash-on-cash and IRR, especially in amenity-rich coastal buildings.

Are Delray Beach coastal condos good cash flow investments?

• Many coastal condos have low cap rates and higher HOA and insurance, which can produce negative cash flow with typical financing unless you buy at a discount or all cash.

When should I favor IRR over cap rate in Palm Beach County?

• Use IRR when you have financing, renovation plans, rent growth assumptions, or exit timing to evaluate, since IRR captures all of these factors.

How should I stress test a Delray investment before offering?

• Model a 10 percent rent decline, a $100 per month HOA increase, and a 50 to 100 basis point increase in exit cap rate to see how cash-on-cash and IRR change.