Cap Rates: How to get accurate Cap Rates in Southern California

[Matthew G.]

First off I'm a newbie.

I'm searching on loopnet for MFP 4-6 units in Orange County in the $1-$1.5M range. It appears that even when I'm reviewing the pro formas for properties within a quarter mile of each other the cap rates are very different (up to 2% difference at times).

I'm trying to do some pre due diligence before I consider contacting the seller and ask for rent rolls etc. but it appears these brokers are just adjusting the Cap Rates to justify their asking price.

Further for most of these properties I'm seeing when I calculate loan payments for the year with 25% down I'm not even close to cash flowing.

Am I missing something?

Is investing in orange county strictly based on speculative appreciation of the property in lieu of 60% down payment to cash flow?

Maybe I should look for a larger property in a better market in another state? However since I live in So Cal I wanted to purchase my first REI property close.

Any thoughts? Anyone have solid ideas on how to find accurate cap rates? I want to value the property myself based on prior performance but clearly need to understand how these rate fluctuate so much.

Thanks

[Jake Kucheck]

Matt,

Really glad you came to BP with this. You are correct that the brokers are doing exactly what you suggest, which means their cap rates are mainly BS/marketing. You have to do your own analysis of whether their historical rents are going to be indicative of what you can get in the future.

As for OC as a speculative market... yeah it probably is. Or an arbitrage market. What it isn't, though, is a cash flow market. It also isn't correct to say that your property will "cash flow" better if you put 60% down instead of 25% because that ignores the opportunity cost of your capital being utilized in other investments. A rental property is only good as the rent it can bare, regardless of how the purchase financing is structured.

In order to understand cap rates, the most important thing you need to have a very good feel for is market rent. Not advertised rent, not "incentive" rent (i.e. tenant gets two free months but signs above market lease for remaining months so seller can sell a better "cap rate"), but true market rent. Once you have a good feel for that, you can back out pretty much everything else to determine whether or not you are looking at a good deal. Odds are if it is multi family in OC and you found it on LoopNet, you are not.