All Forum Posts by: Vlad Denisov

I read the article about the T rates and trying to understand some ideas that they propose. It says when economy is strong and expanding there are lots of opportunities for investors, so they demand a higher returns and buy less treasuries which drives treasury rate.

1. Does it mean that the reason why treasury rate falls is that the economy becomes weaker? Is it the only reason and what could be other reasons?

2. When T rate falls, so the other interest rates.

3. That means that a buyer can buy more and pay less interest of that.

4. That means that RE market strengthens (Why? Just the fact that people CAN buy houses at a lower rate, and people buy more of those doesn't mean that RE market became stronger? Or it does?

5. If RE market strengthens it has a positive effect on the economy(why?) and creates more jobs(why?)

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Originally posted by @Josh Oaten:

@Vlad Denisov

Like what has been mentioned, the Cap Rate is just a representation to compare properties in a market at that time. This issue with Cap Rate for a value add investor like me is that it is pointless. Cap Rate measures and all cash purpose, which many investors don't do. Like I said, its a measure of returns at that specific point in time, but thats no used to me because I am going to reposition and increase its revenue. I could buy a 2% Cap property and increase it to a 4% cap over 3-5 years and make a healthy return, no different to taking a 10%cap to a 12%cap over 3-5 years.

This article by @Omar Khan will clear this up for you more.

https://www.biggerpockets.com/member-blogs/10776/77428-the-cap-rate-is-dead-long-live-the-cap-rate

Great article, thank you.

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Originally posted by @TJ Park:

Gross Potential Income

(-) Vacancy, Bad Debt, Concessions

(-) Non Revenue such as model or employee units

= Net Rental Revenue

(+) Other Income such as utility income

You need to net out vacancy before calculating what the utility income will be since it is tied to occupancy and usage.

What about utilities? Do we put the number for ALL of units that we have in the building or only for those that are occupied?

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Do you include utilities for ALL of the units (kinda like gross potential utilities?) and then later subtract this income from units that don't pay because of vacancy or credit loss by multiplying it?

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1. Do we want our rent growth (and price growth of building) to outpace CPI? Do we look at it like that?

2. If rent growth in Phoenix was 9.5% for the last 4 quarters, then we can assume that price of our building increased more than 9.5%, because of bump in NOI?

3. Can we look at rent growth as the inflation in prices of the buildings? I'm a bit confused, because we can't benefit from inflation in usual life but it seems like here we get a lot of reward from buildings' prices go up because of rent growth. Is it because 'building inflation' is more than CPI? Do we have to look at it like that?

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Originally posted by @Sam Grooms:

Originally posted by @Vlad Denisov:

Originally posted by @Sam Grooms:

Originally posted by @Vlad Denisov:

Let's say we underwrite a deal and we think 3% growth in Gross Operating Income and 2% growth in opEx are reasonable.

Because of this delta, NOI increases every year and Cap Rate as a result. But NOI can't grow infinitely over time, right? What are the reasons this process stop and when should we expect it to stop?

A few thoughts:

Your NOI doesn't grow simply because of the difference between 3% for GOI and 2% of OpEx. Those growth rates can be equal and your NOI will grow at that same growth rate.
If you are going to assume there's a difference between your income growth rate and your expense growth rate, you need to be able to justify that difference. Why will your rents grow faster than inflation (your expense growth rate should be tied to inflation)? Go back 30 years and see if your submarket has actually had 3% average rent growth over that period. If not, what's changed that will allow you to underwrite that for the next 10 years? Is your area rapidly growing?
Yes, NOI can grow infinitely over time, since it's tied to inflation (ceteris paribus).

Sam,

1. The growth can be equal, because expenses almost always are less than 50% of GOI, right?

2. I think, I did a calculation on last 30 years of house price index and that's what I got. Is it silly to apply it to this scenario? I also saw different syndicators underwrite deals using 3% in rents growth for Phoenix.

3. Is the inflation on price of apartments buildings, let's say, in Phoenix much lower than the CPI? Is it super-low?

Not quite. As long as you have any NOI, you'll still have NOI growth equal to the individual growth rates. Expenses could be 99% of GOI, and GOI and OpEx growing at 2%, NOI will grow at 2%.
I would not use the house price index. I would try to find actual rental data. Yes, Phoenix is safe to use 3%. Phoenix rent growth is actually still increasing, where most of the country is seeing declines. Just announced last week, Q1'19 over Q1'18 saw a 9.5% increase. That's incredible. But, you can't take that and use it in other markets.
No, prices of buildings in Phoenix are increasing faster than CPI, because they're tied to rents. Rents here are growing 7-9% a year right now. Inflation is at 2%. Now cap rates and economic loss could affect your valuation, even if rents are going up. But those have only continued to go down, even further helping valuations.

1. Good point, I was missing it.

2. Data always must be as specific to what we do as possible, got it. Phoenix is great, got it :)

3. So, prices of buildings depends only on rents and all that can impact those rents? (economical vacancy, physical vacancy, jobs, population, etc)?

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Originally posted by @Dylan Legg:

So I live in the Saint Louis area, and I am looking for a Multi-family home (Duplex or Triplex) to buy in the Western, Southwestern, or Southern Suburbs of Saint Louis. I'm looking to "house-hack" with this first property, by living in one side and renting out the other.

The problem is there are virtually none available. I look through Zillow on a daily basis, and my agent has a blanket area search set through her MLS that automatically sends me multi-family homes in that area once they come available. By using this strategy I'm getting about one result a week, and of these results, only 1/4 of these are contenders.

I'm thinking about starting Direct Mail to the owners of these properties in the area of interest.

My question: Are there other methods I could use to help quicken this search for a good fit within the area I'm looking?

Google 'wholesaling'

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People say Cap Rates are the function of investor's appetite. If they are willing to pay less for NOI, Cap will go up.

What about the tenants on the other hand? If they decide that 1000$ for studio is too expensive, and they can't afford it based on economics they can make the prices to go down. That will decrease our NOI, and Cap will also go up.

So, is Cap really a representation of investors appetite or D&S of rental housing? Or maybe it's a combination of both?

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Does this inflation on apartments is simply the difference between market cap rates over years?

So, if now Cap is 5% and the next year it's gonna be 5.25% then inflation for this period was 5%?

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All Forum Posts by: Vlad Denisov

Vlad Denisov has started 21 posts and replied 57 times.

Post: What cap rate should I buy multi family at?

Post: How do treasury rate effect economy?

Post: Who determines the Cap?

Post: Utility Income&Miscellaneous Income

Post: Utility Income&Miscellaneous Income

Post: Delta between future income and expenses

Post: Delta between future income and expenses

Post: Creative ways for looking for Multi-family Properties??

Post: Who determines the Cap?

Post: Delta between future income and expenses