Is your apartment market too expensive and getting bubbly?
Caps in the low 5s, multiple offers, cash buyers beating you to the deal? If you're in a coastal market, and increasingly more markets across the country, apartment prices are on the rise. As Value investors we're trying to acquire properties below market that will cash flow day 1 but it's getting tougher to do as institutions spread out from the major markets looking to deploy their cash.
Whenever I start thinking things are getting out of hand I'm reminded that it could be worse: My home market could be Vancouver BC. There you can get a 55 year old flat roof, single pane aluminum window, central boiler, unremodeled building for the low, low cap rate of 2.6! Yep, that's not a typo, and not a listing but a sold property. And that's a broker's 2.6 cap with income and expenses fabricated starting with a vacancy rate of .25%, yes that's point two five as in a quarter of one percent. But that's not all folks:
The current owners have a property management expense of approximately $8,700/year plus a janitorial expense of approximately $8,000/year. We have deducted this figure from the proforma and have instead added a caretaker expense of $6,600 ($50/suite/month) as it is assumed a new owner will be more "hands on".
(1) Landscaping anticipated to be approximately $2,900 with the current provider. We have normalized it to $1,500/yearly
(2) Repairs and Maintenance normalized at $800/unit/year.
(3) Caretakers expense added at $6,600 ($50/suite/year).
(4) Projected income based on anticipated market rents on suite turnover.
So they've chopped $11,500 of actual expenses from the proforma and assumed that all existing tenants would be thrown out and instantly replaced with new ones paying 'market' rents 20% higher than current. Combined that's more than a $43,00 swing in NOI. At a 2.6 cap that's $1.7M in distortion er, proforma value.
There's nothing sweet about that 11 suite deal. But it's not a one off, properties like this are being sold in Van regularly. Here's another, let's call it the 'When I'm 64' building*. Built in 1950, flat roof, single pane aluminum window, central boiler, unremodeled, sold for the low, low broker's cap rate of 2.8%.
You can check the first one out here (Don't tell them I showed you ;)
And the second one here: http://goodmanreport.com/listings?utm_source=Goodman+Report+-+May+13th&utm_campaign=db8e38328c-21745_13_2014&utm_medium=email&utm_term=0_beac3e155a-db8e38328c-410230045#1093
For more broker porn featuring per unit prices from the mid 250s up to 500k check out other recent solds here: http://goodmanreport.com/listings#view=past-sales
So when you think things can't get worse, just remember what our neighbors to the north are dealing with.
Good hunting-
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