All Forum Posts by: Immanuel Sibero

Congratulations and welcome to real estate!

Cap rate is not relevant in SFHs. It is a valuation metric generally used in commercial real estate. This doesn't stop many investors in SFHs from using cap rate. I can describe it this way - you can analyze SFHs with COC or you can analyze with Cap Rate. But when you analyze with Cap Rate, you will eventually realize that you need COC. So... why even bother with Cap Rate?

Cheers... Immanuel

It's Dead, Jim.

Cheers... Immanuel.

So NOI and CoCr to make a living vs. APPRECIATION and IRR to build wealth... Does that sound about right?

Cheers... Immanuel

I learned a lot from YouTube, I'm going to miss it when AI and ChatGPT take over... 

Cheers... Immanuel

Some more food for thought: 

I invested in larger apartment syndications (350 and up), one of the investments was actually a portfolio of two properties. My observation was the bigger properties tend to trade at higher cap rate (i.e. contrary to your expectations). Everything else held constant, large number of units carry relatively higher risks which put upward pressure on cap rate. Also, in the 350 unit and up the market is not as crowded (it's harder to syndicate large number of units), so less players means less competition, less competition means lower prices)

As to the question: Can you charge more for economies of scale?

I agree that there may be economies of scale by pooling multiple properties. However, as a buyer I'm buying your most recent NOI. If you're able to achieve economies of scale during your hold, they're reflected in your NOI (i.e. your NOI would have increased because your expenses had come down as a result of the economies of scale). Since I'm buying NOI (based on T12), I'm already pricing in this increase in NOI. No need to pay a "premium" for it.

I'm curious what the data from Costar will show though.

Cheers... Immanuel

Cap rate used to value a property is determined by the market, not by the investor. It generally varies from market to market and across property classification (i.e. A, B, C etc.) Exit cap rate is the cap rate that you estimate to be the prevailing cap rate for the specific property and specific market when you go to sell. Since this rate is an estimate of what the market determines in the future, an investor needs to make a decision whether he wants to be aggressive and estimates a lower cap rate at exit than his Entry cap rate or be conservative and estimates a higher cap rate at exit than his Entry cap rate (usually by some measure of basis points).

As to your question about rolling up units: Are these units located in different market? If so, they should be underwritten separately as they operate under different circumstances and more likely have different market cap rate. As a buyer, I would underwrite different properties in a portfolio separately, especially if they're located in different market.

One thing is for sure though, the properties (i.e. their conditions,  age, whether they're rolled up in a portfolio) have no bearing on Exit cap rate. This rate is determined by the market when you go to sell (i.e. using recently sold comparables).

Cheers... Immanuel

@Mason Beyer

Congratulations on your first post!

An example of a 10% CoC is when a house is purchased for $100,000 and the house generates $10,000 net cashflow every year (i.e. CoC = 10,000/100,000). If you and I were in a 50/50 partnership and bought this house, you would put up half of the money to purchase the house and share half of the cashflow. So your investment would be $50,000 and cashflow would be $5,000 per year. Your CoC would be 5,000/50,000 which equals to 10%. So both of our CoC would be 10%.

A 10% CoC for a rental house is usually not worth the risk. You can invest in a syndication (i.e. passive) and get 14% or higher.

I'm not sure I understand your last question, could you elaborate?:

Are we essentially promoting the safety of the investment with the upside of potential appreciation?

I think you're asking if a rental house is likely to appreciate in value (a distinct possibility in many cases), this somehow reduces the risk of the investment (i.e. making it a safer investment). IMO, the answer is no. The appeal/attractiveness of an investment is a tradeoff between expected return and perceived risk of that investment. An investment is more attractive when expected return increases or when perceived risk decreases. So potential appreciation in value does not increase the safety of the investment, but it certainly makes the investment more attractive.

Cheers... Immanuel

 I might have misinterpreted when you said normal. But,

...if interest rate is 6%, cap rate can not be 3%.

I know this is an exaggeration but I don't think cap rate ever goes below interest rate. You may be comparing cap rate to retail residential mortgage interest rate, but then again you wouldn't finance an apartment building with Quicken loan. According to CBRE average national cap rate for MF's bottomed out at around 6% in 2022 and expected to climb thanks to the Fed. I think you can still get 5% interest rate from Freddie/Fannie even today!

Even in the extreme case of 6% interest rate and 3% cap rate, you can still finance, be cashflow positive, and profitable, with DSCR above 1.2. You just won't be able to finance at 75% LTV. But try 30% LTV and do the math, you'd be fine.

So even though cap rate really never goes lower than interest rate. It is not true that cap rate always has to be higher than interest rate to make it happen. LTV ratio has the final say.

Cheers... Immanuel

@Vincent Chen

Investors do not increase/decrease market cap rate. The market does. There are variables that affect market cap rate, an important one being interest rates. Long term, in general cap rate tracks with interest rates. Given that interest rates have been rising, expect upward pressures on cap rate.

When do things get back to normal? What's normal? Interest rate in the 3s and 4s? Interest rate was once 16 and higher... Or maybe we're ushering new normals? The 2020 pandemic had sure created quite a few new normals.

Cheers... Immanuel

@Rhondalette W.

I second @John Sayerspost which IMO appears to be the one that answers your question.

The "market" cap rate you were asking for is the rate normally used to value an MF property. But like any other valuations in general, it all comes down to comps. What $/sqft is to single family homes is much the same what cap rate is to an MF property. Comparable SFH's in a particular area will generally go for the same $/sqft in much the same way MF's in a particular area will generally go for the same cap rate. So it would make sense that you would get market cap rate the same way you would get $/sqft (from brokers, lenders, investors, and other sources). Like $/sqft, this "market" cap rate is determined by, well... the market, not some formula or T3/T12 etc.

I would also add when it comes to small MF's (5-20), some investors would make the process simple by using price/unit to estimate value. But again, they would still use comps from recently sold similar properties.

You mentioned the 2nd cap rate... the deal cap rate. This is probably for another post... LOL, but I have yet to read or hear a good explanation of how this "deal" or "property" cap rate is useful. Although I must admit there is no shortage of people who would just throw the formula at you (i.e. NOI/Price).

Cheers... Immanuel