All Forum Posts by: Craig Grella

THe cap rate is used simply to compare two similar income producing properties. It is the rate at which a property's income is being capitalized expressed as a percentage of the purchase price of the property.

It is a ratio used to compare one property against another, and should not be used as the sole factor in determining whether a property should be purchased.

Mathematically, it is defined by the equation:
Net Operating Income / Purchase price (or Estimated Value).

Since NOI is cash flow, your cap rate will have a direct relationship to cash flow. Holding all other things constant, if cash flow decreases, Cap rate decreases. This means that the net income (if any) is being capitalized at a slower rate compared to the purchase price or value of the property.

For instance, if one pays 1,000,000 for a property with an NOI of 100,000 the cap rate for that property would be 10%. If a similar property next door had a NOI of 80,000 with the same purchase price of 1,000,000 the cap rate would be 8%.

What that means is that the first property is capitalziing income at a rate of 10% of the purchase price per year. The second property is generating 8% of the purchase price per year. Again, holding all things equal, tenant type, quality of tenants and leases, expenses, etc. You would purchase property #1 over property #2 because it is returning a higher percentage of the purchase price. Your investment is being recouped quicker.

Again, the cap rate is a mathematical expression used to compare two relatively similar income producing properties.

It has nothing to do with tenant type or geographical location. It is simply a mathematical expression, like expenses/sf. However, since it is generally expected that newer buildings will have higher rents than older buildings, and high quality tenants will pay more for nicer space then a fledgling business would pay Cap rates are expected to be lower in new construction properties, and high quality assets, like high rises in urban areas.

You can extrapolate that further and make generalizations about geographic areas, saying that a certain neighborhood is known for better quality buildings and therefore might have a lower cap rate overall than the neighborhood one zip code over.

Analyzing details about income and expenses, tenant quality, and demographics about the property neighborhood are more important than analyzing cap rate, in my opinion.

The cap rate is a valuable tool to compare two like income producing properties.

Hope that helps.

There was a recent forum here in seattle at which RE advisors commented on the state of the apartment market and the effect the ailing economy has been having on rent prices.

Here in seattle, we've seen a 3% reduction in rental rates on average, and are expecting a potential drop of almost 10% over the next year.

I have not yet seen a reduction in any of the units I'm renting, but i have started noticing an uptick in late rents.

I'm considering writing an article about some creative things landlords have done to combat this falling rental trend and the increase of late or missing rent payments.

I'd love to get some comments from the biggerpockets group for the article, and also to help some of the other biggerpockets viewers who might be experiencing the same trends.

Post away...

You may want to read a recent post on the biggerpockets blog, written by yours truly.
http://www.biggerpockets.com/renewsblog/2009/09/25/difference-sam-zell/.

It speaks to investment proposals for soliciting money for real estate ventures.

Hope you find it helpful.

-Craig

I haven't taken any Kahr real estate courses, but similar courses from CCIM and other commercial seminars are very informative.

Partitioning the IRR is a great exercise for investors to learn, and an effective way to determine exactly where your returns are coming from in your investments.

Not to mention, serious developers and commercial investors use most of the methods listed in the course offering.

there are many reasons why there might be two structures on one lot. Zoning back then may have permitted such a use.

Even if it is a non-conforming use now, which it sounds like it may be, once you demolish you will have to build to code, which might prohibit two structures on a lot.

I would start with local zoning board and confirm the legal zoning use, because that's the one that will matter moving forward, and that's the standard you'll be held to as the current or future owner.

In many states, especially if you have paper with them before making offers, the agent is required to submit your offer, no matter how "stupid" it makes you look. The only reason they would not do so if there was a pre-existing condition from the seller that says not to accept offers lower than a certain amount. If that condition doesn't exist your agent could be breaking several agency rules and could be fined for his/her conduct.

Outside of that, I'm sure there are hundreds of hungrier agents in your area that would be happy to get your business.

If you can't hold it for better times you might have to get what you can for it.

Try to get a hold of some commercial developers who can weather the storm, finish the permitting and get something done with it.

THere's a firm out of Elmwood Park, Langan Engineering, that's my old engineering firm. they do a tone of work in your area and are one of the biggest retail developers on the east coast. Try reaching out to someone there and seeing if they can turn you on to some developers.

Also, try roseland development. Very big in your area as well.

Good luck.

Jon and MikeOh bring up the point that first came to mind when i read this post. I hate to be negative about it, but in my experience, when tenants ask for reduced rent to fix things in the apartment they are either covering some damage they caused or are planning to move and want to tidy up so they get their security deposit back.

I've let a few tenants, the ones that are handier than i am, fix things in their units. In each case, i inspected the work before and after, and made them give me receipts for the material they used. I did not pay labor in any case. Just materials.

While you will benefit from economies of scale for bigger items like a roof, you don't gain in the individual units.
For instance, a 10 unit mf building, garden style, will have roughly the same size roof as a two story 20 unit property with the same footprint. The roof will need to be replaced at the same time for both properties, but you can amortize the cost over more units. Same amount of money, but on a per unit basis, the cost is lower.

To more precisely answer your question though, I've never bought a property in which i did not have a full rent roll and historical expense statement. That's not to say my expenses didn't go up on once i bought them, but it helped me do a more thorough analysis.

For my analysis, I use a minimum of $250/unit per year on my properties with 10 units or more. Unless, the historical expense statement would indicate otherwise.

If this is your first MF purchase i wouldn't mess with a 20 unit if the seller or seller's agent is unwilling to turn over their data. it's not worth the trouble in my opinion. A $700 additional cash flow could turn into a $700 deficit when you start uncovering those skeletons.

most hard money lenders don't care if you've been self employed for 2 hours, let alone 2 years. They're making a loan based on the value of the asset. They might check some financials to make sure you can afford to make the payments, then again some HML's like the "loan to own" programs where they thank you for brining the property to their attention, make you the loan at 50% ltv knowing full well you will default, and then they take it back when you do.

As far as refinancing goes, you can go conventional for SFR's, limited of course by your credit rating, income levels, underwriting, etc., or back to hard money, limited most likely by some low ltv (50-60% max), or a local portfolio lender who might give you a higher ltv, with a rate that will be between conventional and hard money, and you'll have to qualify based on income.