I sat down with an investor client last month looking at a duplex on Landis Street in North Park. Two beds each side, nothing fancy, listed around $1.05 million. His first reaction was that the cap rate looked terrible. And honestly, on paper, it did. Somewhere around 3.8% based on current rents.
He almost walked away. I told him to slow down.
The thing most investors miss in these San Diego urban pockets is that cap rate at purchase is only one part of the equation. That Landis Street duplex sits three blocks from the 30th Street corridor. Rents on comparable units in that stretch have climbed roughly 18% over the past two years, based on what I've tracked through listings and lease comps. The neighborhood keeps pulling in tenants who want walkability, food, nightlife. That demand doesn't soften just because interest rates moved.
So the real question isn't "what's my return today." It's "what does this asset look like in 36 months with natural rent growth and a little cosmetic work."
We ran a projection. With modest upgrades (new flooring, updated kitchens, better landscaping) totaling about $40K across both units, projected rents moved from $2,100 per side to closer to $2,650. That changes the math significantly. The year-three cash-on-cash return moved above 6%, and the equity position improved by a comfortable margin.
I've been doing this for 25 years now, across real estate and building businesses, and the pattern I keep seeing is this: the investors who do well in neighborhoods like North Park aren't chasing yield on day one. They're buying location strength and forcing appreciation through smart improvements. The ones who lose are the ones shopping spreadsheets without ever walking the block.
I'll say something that might be unpopular with the pure numbers crowd. In neighborhoods like North Park, Hillcrest, University Heights, I think cap rate is the wrong primary filter for a duplex purchase. Rent trajectory and neighborhood momentum matter more. A 3.8% cap in a flat market is a bad deal. A 3.8% cap in a corridor that's still absorbing demand and pushing rents? That's a different conversation.
My client closed on that Landis Street duplex. Renovations start next month.
I'm curious what metric you lead with when you're evaluating a small multifamily deal.