All Forum Posts by: Account Closed

OK, so you are using actual numbers to compute NOI. This number is useful. But NOT to calculate a cap rate on a small residential property. But let's agree that you want to calculate a cap rate based on these actual numbers. What then? How does it predict how an apartment will perform. I'm assuming that "perform" means profitability.

People need to realize that a 15% cap rate can result in huge losses and a 7% cap rate can mean HUGE profits. A cap rate is NOT a measure of profitability.

With small residential properties, I usually just use rent/cost ratios and comps with my estimated cap rate as a distant third.

Cap rates are more of a method of valuation, i.e. building in a certain area/age/condition should have an 8 or 9 cap or whatever. It's basically a method of comping out apartments, at least as far as I'm concerned. And in that way, they are useful as 1) there aren't that many apartments to comp compared to houses and 2) a per unit price isn't very helpful when there are so many other differences between apartments.

You would have to have a very brutal debt service to not be profitable with a 15 cap. Cap rates basically shows what your return is compared to the amount the property costs, it's cash on cash return without debt service. And since debt service isn't tied to how well the property is being run, the actual cap rate (not the estimated) is useful in that respect.

But wouldn't you have more "profitability at a 20 cap? How do you use your computed cap rate to know that you are NOT paying over market? The "return" you are counting on so much is for ONE point in time. What about rent growth or decreases? Market appreciation? If you don't have comp sales HOW do you have cap rate comps!?

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Originally posted by @John Horner:

Originally posted by @Bob Bowling:

Originally posted by @John Horner:

Why wouldn't I want to compare CAP rates from an area on the West side of Columbus to an area on the East side? Completely different style houses, tenants, etc but I have the ability to invest in both areas, and CAP rate is a quick way to compare the 2.

Good for you using COC. Bad on you for furthering investment ignorance by selling based on "crap rate" criteria. But hey a guys gotta make money.

You answered your own question as to why you wouldn't want to compare cap rates for the west side to the east side, "Completely different style houses, tenants". You just lost any comparability! Are you actually telling investors HERE to only invest in the "higher" cap rate. Bad Man!

Ask yourself, WHY and WHO are buying at the LOWER cap rates? Local smart investors that understand the profitability of the local market vs the "imprestors" from out of state that are being sold higher "crap rates" on the wrong side of town because they don't understand what a cap rate reflects?

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Originally posted by @Andrew Syrios:

Originally posted by @Account Closed:

How does a cap rate estimate how an apartment will perform?

Sorry, I should have been more clear. I'm not referring to an estimate, I'm talking about the actual cap rate from the previous year's operating statement. That number is very useful. You should always be wary of estimates, especially when provided by a seller.

People need to realize that a 15% cap rate can result in huge losses and a 7% cap rate can mean HUGE profits. A cap rate is NOT a measure of profitability.

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Originally posted by @John Horner:

We're not talking about picking a CAP rate and buying at that point forever. We're talking about tracking CAP rates so that we know what deals look like in relation to other deals in different areas at different times. If we track them correctly we will know when they start changing and when to adjust where, when and at what price point we buy.

On this site alone people use CAP rates to analyze SFH's all day, every day.

Lastly, I don't think anyone uses the sellers claimed info to calculate CAP rates, that would be irresponsible, I use neighborhood specific rental comps and expenses.

What difference does it make what a cap rate is in "different areas at different times"? The comparability is in similar locations at similar times. 1985 Detroit cap rate for commercial properties compared to LA 2002 ???

"On this site alone people use CAP rates to analyze SFH's all day, every day." I agree that they do so and they do so incorrectly. Can you explain how this analysis is done and how it produces any actionable result? Again, if you are using neighborhood specific rental comps why not use the easier and more accurate GRM process. And where are you getting neighborhood specific expenses?

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Originally posted by @Andrew Syrios:

Cap rates are definitely based on assumptions, so I rarely use them with houses or with seller pro formas. But with apartments, when you have real numbers, they are very helpful. They are also good when working out your own pro formas or estimates for how an apartment will perform.

How does a cap rate estimate how an apartment will perform?

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Originally posted by @Omi C.:

Thanks everyone for confirming my understanding of cap rates.

@John Horner I have my own cap rate calculation for every property I look at, and use that to compare against other/previous deals. ... totally agree that cap rate is just another rough rule of thumb, and that there is no black and white metric which will tell me whether to buy or not.

What good is some made up calculation to compare to your previous deals? Are you thinking a cap rate predicts profitability? Do you realize that cap rates are property, location and time specific?

A cap rate is a specific calculation that tells you at what rate the MARKET is buying an income stream for a specific property in a specific location, at a specific time.

A cap rate is generally not used for small residential properties mainly because these owners do not report accurate income and expenses and there is no place where this information would be analyzed and reported. You would be better to use a GRM. It is easier to get/estimate market rents and sales prices. Then you can easily compare similar properties in similar locations.

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Quick, lets all go buy there! Let's look at rents over time and see how FAR they drop on the list.

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Sounds like she's spending YOUR deposit on her last months rent. The only thing I'd accept is weekly payment. That way you are pushing out the time one week at a time. If she can't come up with one weeks rent now she probably won't have a full month's rent in two.

2 Votes

Originally posted by @Brian Gibbons:

@Account Closed sounds like you are licensed.

I have had my sellers talk to either their PM or Agent's Broker and been released of their agreement, no problem.

Then I entered into a lease option or a cash sale with no issues, regardless of the contract signed initially.

I do tell the seller that they have a contract in force, and they need to be released in writing, and it would be prudent to check with an attorney.

Yep, licensed back in the day & with law school and experience I would not spend on cent until I had an agreement signed subject to AND all parties on board and signed off. Experience tells me big realtor lady would probably let this little deal go BUT If the bad behavior was not based on the PM not delivering the offer she might get real pissed and she really wouldn't have to spend much to bring any deal to a halt.

I would have gone to realtor first if I'd had proof. Can't imagine her risking her license for this deal.

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Originally posted by @Curtis H.:

@Brian Gibbons

That's more or less what I was thinking. As long as there is no paper trail until AFTER the agreement is known to be over between the owner and the PM, should be ok.

Nooooooollllllll. Generally the contract will obligate the owner for a commission for any deal with any person that they produced for a peroid of time long after the contract has expired. According to you both the PM & owner are not quite right. I would not be in a hurry to jump in bed with these people.

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All Forum Posts by: Account Closed

Account Closed has started 8 posts and replied 3607 times.

Post: The problem with cap rates?

Post: The problem with cap rates?

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Post: The problem with cap rates?

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Post: Highest Rents In The Country???

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Post: A Potential Deal but...Property Manager

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