19 year old with question about selling based on cap rate

[Devon Rollison]

Hello I am 19 and soon to start wholesaling, can someone PLEASE look at this and tell me what is wrong with this/ how this is not the true reality... it seems WAY to good to be true it is literally insane, but realistically it should be very reasonable I would think. So yes please anyone if you have any educated feedback id very much so appreciate it.

Wholesaling Profit Calculations Based Off The Cap Rate (Also pertains to anyone selling a multi family property not just wholesaling)

Ex: 1:

I Buy/put under contract a $1m property to wholesale

I Buy:

-@10% Cap Rate, which=$100k NOI

I Sell To Buyer Of The Contract:

-@9% Cap Rate =$1.111m Property (11% more ie $111k profit)

-@8% Cap Rate =$1.255m Property (25% more ie $255k profit)

-@7% Cap Rate =$1.433m Property (43% more ie $433k profit)

Ex 2:

I Buy/put under contract a $1m property

I Buy:

-@8% Cap Rate =$80k NOI

I Sell To Buyer Of The Contract:

-@7% Cap Rate =$1.145m Property (14% more ie $145k profit)

-@6% Cap Rate =$1.333m Property (33% more ie $333k profit)

Obviously this should be very possible and reliable because it is simply putting a property under contract at a certain cap rate and selling it to a investor that will accept at least .1 percent less Cap Rate, which is obviously guaranteed. So I can simply get buyers that will accept the lowest cap rate possible, say 6-7% is decently reasonable, and I can find deals above 6-7 cap rate then simply raise the property price to whatever the buyers acceptable Cap Rate is and keep the the difference as seen above. Best part to is profit does not even go down depending on if you have a high cap rate deal or a low cap rate deal, a profit margin of 1% lower cap rate to the buyer is 11%-14% of the PP as NET before tax profit, which is absurd. Only problem I could really see is that you cant just put the property price to whatever you want, however you can put it to whatever amount people are willing to pay, and people are willing to pay for 6-7 caps all the time and the math is basic undeniable math, so I really cant see what i'm missing. The only other thing I can think of is the fact that most people buying apartments/commercial go off other factors than the Cap Rate, like the pro forma, ability to increase rents, cash flow etc.

[Evan Polaski]

@Devon Rollison  I am echoing the others.  Technically there is nothing wrong with your math.  There are always deals out there, for those that are willing to hunt for them.

I do think in practice finding someone that will pay 1% less in cap rate is fairly big jump.  And the lower the cap rates go, as you can see in your calculations, the profit margin grows exponentially. 

The issue other issue that was brought up is the sophistication of the buyers. The bigger the price tag, the higher the potential profit in absolute dollars, but also the more diligence the buyer will put on the property. This can get you into trouble if you do not fully understand every detail of each income and expense item. Your NOI might be $100,000, but a buyer might notice issues in the financials that only a seasoned operator would know, so they are valuing $80,000 NOI. In this case, your 10% cap rate can sell at an 8% cap rate and still only be worth $1,000,000.