Newbie from Los Angeles - where have all the good cap rates gone?

[Daniel Smith]

Hello, BP residents! I'm a new investor from Los Angeles (Studio City, to be exact). I'm in the entertainment industry but ready to branch out to REI. Looking to start investing in SFR rental properties in the greater LA area or, alternatively, finding good turnkey opportunities in other areas (Las Vegas, Kansas City, Chicago?).

But where have all the good cap rates gone?

I've been focusing on some of the more desirable areas of LA that feature good schools and good potential for future appreciation. In the last month or so of sifting through every available listing, it seems as if every single property offers a cap rate somewhere between 0-2.5%. Yikes. I might be new at this but even I realize that's not a promising entry point for a new investor.

[Mike Nuss]

@Daniel Smith, @David Faulkner nailed it. In my opinion, looking strictly at cap rates for investment properties is a sure fire way not to do well. Cap rates have one purpose and one purpose only. Which is to connect net operating income and sales price (or value) to a yearly return on investment. That's it. In the world of real estate investing that's only needed for a few things; borrowing, purchasing/negotiating and selling. 

Profit comes from all the cracks and crevices in between those 3 events. Most people that complain about low cap rate environments don't understand the nuances of real estate. Low cap markets allow you to double financial rewards for the same amount of work (most of the time less) as higher cap rate markets, and that's just quick math on the cash flow side of the equation. That doesn't include appreciation, which many people call speculative, which shows misunderstanding of the nuances even more. 

Low cap markets don't require appreciation in order to be better assets in the long run. They're huge tools of leverage. Just paying down one mortgage in LA can be more beneficial than buying 10 rentals in Kansas City. 

Cash flow is all about deal structure and mindset. Understand deal structure and you can cash flow LA. Guaranteed.