All Forum Posts by: Omi C.

Definitely interested j! Happy to volunteer and help as well. Let me know what I can do..

Hey guys.. I am also a new investor interested in the Central Valley. I've been focussing on Bakersfield lately, but perhaps I need to broaden my search area. I live in Santa Cruz, so weekdays will be tough to pull off. If any of you want to meet on a weekend, I am totally in.

@Account Closed I actually agree with you that any advertised or external cap rate is close to useless. Thats the whole premise I started with after all.

However, if I'm evaluating a couple of properties, and I calculate *my own* cap rates for them, based on *my own* estimates/assumptions about cost, then its an interesting metric for me which I can use to see which property might perform better relative to their market value if my assumptions turn out to be right. This is what I meant when I said "when used appropriately". If that consideration isn't interesting or useful to you when evaluating a property, then more power to you.

@Joel Owens I'm looking at 2-4 plexes for now, but hope to graduate into larger properties. The fact that even for a small MF the valuations are not strictly based on income is a great insight. Why do you think that is? I understand that with an SFH most buyers are occupants and therefore have a lot of emotion tied into a particular deal. Wouldn't even a small MF purchaser be more of an investor, and therefore give more weight to income, expenses, and ROI?

@Account Closed I agree that cap rate alone (or any other numeric metric on its own) can't be used to determine whether to buy a property or not. I don't think anyone on this thread claimed otherwise. However, I do think that when it is applied appropriately, it can be a useful metric (in addition to COC, and others) to consider when evaluating a property.

@Wendell De Guzman I did listen to your podcast - great show! Fully agree that its not all about the numbers and that no spreadsheet should really dictate whether I buy a property or not. I'm still a newbie, and I don't know what I don't know. Conservative cost estimates are one of the my safeguards to ensure that I don't lose money on my first deal.

@John Horner Yes, COC is the most pragmatic way to look at things. In my spreadsheets I call it SMTM - for Show Me the Money! :-)

Thanks everyone for confirming my understanding of cap rates.

@John Horner YES this is exactly what I do! I have my own cap rate calculation for every property I look at, and use that to compare against other/previous deals. The metric I really look at though is cash on cash return - again using a calculation based on my own assumptions and analysis.

@James Wise , @Bill Gulley 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. Working on gaining my experience in evaluating my market, and the deals in it. Thanks for the help!

When I first learned about cap rates I thought that they were a great way to compare properties independent of any particular investors financing situation. It also sounded like every particular area/neighborhood would have a "standard" cap rate, which would also help in figuring out whether a particular deal was above, at, or below market rates.

However, now that I think I understand cap rates a bit better, they seem speculative, situation specific, and therefore unreliable as a tool for determining the merits of a deal.

I think this because the cap rate is so heavily reliant on the assumptions one makes about the costs of owning a property. My standard assumptions around costs include 8.33% vacancy, 10% property management, 10% maintenance, and 10% capex. However I am yet to see a single deal where anything close to these costs are planned for. The biggest cost seems to be some "actual expense" from the previous year which is generally around 5% of gross. Sometimes vacancy is included, but generally not - especially if the property is currently fully occupied. So with none of these costs accounted for, of course the cap rate is going to look great!?

Have I misunderstood something about cap rates? If you rely on cap rates when evaluating a deal, why do you do it?

Well, to wrap up this thread. I made an offer on the property. Apparently other offers were received at the same price, so the seller asked everyone to counter with their "highest and best". I felt I was already at that point, so I added a token amount to my original offer and sent it back. Seller accepted someone elses offer. Oh well! On to the next one.

Thanks @Kiran R. . For the first deal, I'd rather be too conservative than the alternative.

@Franklin Romine Total sq ft is 2100 approximtely. Water is paid for by the tenant (seperate meters), and trash is covered by the city property taxes. Totally agree with your "isn't horrible" assessment. :-) The point of this property is to learn the business, while not losing money.

@Ned Carey Yes, I'd have like to see higher CCR as well. I'm trading off the high CCR by buying a lower risk, higher cost property. However, if the tenants stay for the first year, or if Maintenance+Capex are closer to 10% like you suggest, then the CCR goes to 15%. I'm trying to paint a worst case scenario with my numbers.

Thanks for the feedback you guys!