Las Vegas 4 plex - 25% CAP rate - what's the catch?

[David Knell]

Hi -

New here, so please be gentle with me..! I'm looking at a few 4 plexes in Las Vegas, rehabbed and rented, with CAP rates in the range 23-25%. Even after allowing the recommended 50% for expenses, etc., they still look like a remarkably attractive investment.

Which brings me to my question - what's the catch?!

Thanks --

Dave

[Will Barnard]

Max,

Averages are just that, averages and mean nothing for one specific investment. That said, if you end up with 50 doors over a long period of time, you can expect the average to be very close to this number when said and done.

Locations and rent values play a role in the fluctuation of the "average" total costs.

What I do is get the current vacancy rate and compare it to the last 24 month vacancy rate. If the current is higher, I use teh last 24 month average as my plug in for vacancy. If the current is lower, I use that number. After subtracting the vacancy (also rent loss), I come to the AGI (adjusted gross income). From there I subtract out "operating expenses" and "capital reserves" to arrive at my NOI (net operating income).

One could say that the 50% rule does this all for you, but I like to have a more accurate number for a specific property.

Again, keep in mind that locations and rent values affect OE %'s. I have found that my properties with rent values above $1000 have a bit lower in operating expenses as I have expereinced less tenant damage, lower turn-over ratios, and lower other costs.

Location also changes things. Places like Detroit and similar have statewide higher vacany rates than other places and as such, you coulod have higher than 50% Total expenses in some places. If you always invest in these types of locals, you could always have hiogher expenses.