All Forum Posts by: Christos Philippou

christos, here is an article to read on Cap rates and a link to the same conversation @Account Closed and I just had: https://www.biggerpockets.com/forums/32/topics/277.... in that conversation i point out even another article to read.

Thanks Pat I will check it out!

**** final question before I let you all get on with your lives haha: all over you see "buy high and sell low"... Can somebody explain? How do you buy at a higher rate, decrease expenses and raise income then sell at a low rate? ***

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Originally posted by @Account Closed:

Jeffrey's explanation of CAP rates was just fine and very indicative of how you buy turn-around properties. I'll say it another way to avoid confusion by using a property I purchased.

Purchase price: $650,000

NOI at purchase: $26,000

NOI under normalized operating conditions: $114,000

CAP rate at purchase: 4

CAP rate under normalized operations: 18

This deal only required a 7% rent raise and also required me to not hire 3 of the 5 park employees at closing. It was the equivalent to an 18CAP purchase from day one. Had I been rigid with my 10CAP requirement, my offer would have been $260,000 which is almost equal to the yearly revenue for this property. Clearly, the seller would have never sold it for that.

Placing emphasis on existing CAP rate is a very small piece of the the picture. If you are buying properties that are in distress, then you need to throw out the CAP rate at purchase and base your offer more off of what the CAP rate/CoC/value would be if the property was running properly.

The ease/difficulty with which the upside is realized determines how close to either end of those values you'll be willing buy at and what financing terms you're willing to accept.

This is great, thanks so much for your feedback. You see so much about CAP rate spread all over these listings and used as a selling point but it seems like you have to be really careful as there are many many factors that go into calculating it, and even WHO is calculating it.

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Originally posted by @Jeffrey H.:

Capitalization rates only reflect how a business is performing under the current management.

If you can increase revenue and decrease expenses after taking over then your capitalization rate will increase. If you keep operations the exact same then the cap rate will not change. If you mismanage the property and revenue goes down and expenses go up then the cap rate goes down and the business is less valuable.

If rents are below market rates and you increase them, or you have master metered utilities that can be submetered are some ways to change these variables influencing it.

Hope that helps explain what it means and the economics.

Where is your expense line items for vacancy (10%), management (5%), and capital improvements (5%)? Any office supplies, lawn service, attorney fees (when you evict someone), etc?

Hey Jeff, thanks so much for the response! We do have the units individually metered, we pay for the water and gas (just to heat the entire building, not their appliances).

I didn't include vacancy rates, I guess I should... The building has been rented out for the last 7 to 8 years straight with 0 vacancy.

No management fees as my wife and I manage it ourselves.

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Hey everybody, noobie here again. I have been reading like crazy and like everything, there seem to be 100 different discussions, opinions and thoughts about everything in this business.

I have been reading about CAP rates and read in some places to forget it, don't worry about it, it's not important. Other places say us as investors NEED to know our CAP rates and must know the numbers down to a T.

That being said, can somebody help me out here? These numbers/CAP rate just doesn't seem right for some reason. Most CAP rates I see around the MLS and other listings range from 5%-15%. The way I calculated mine, it's like 20-30%? Is that right or am I missing something big?

I purchased a 4-banger for $110,000. It brings in $2,590 a month, so $31,080 for the year.

My year expenses include: $3,000 for gas and water bills, $750 for insurance or so, $1,500 for property tax, and estimate $3,000 for repairs (probably a big over-estimation). TOTAL: $8,250.

My NOI should be $22,830 based off these numbers, unless I am missing something big here.

If I purchased the place for $110,000 and my NOI is ^^^... my CAP Rate is about 21%.

**** TL/DR: if my Cap Rate is 21%, could that mean I got a steal on the purchase price, and my property is actually worth significantly more than $110,000? ****

THANKS!

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Hello everybody, total new guy here, so let's get the eye rolls started haha.

Just had a few quick questions about a specific scenario I am running into with my recent RE endeavors. I purchased a property from my father in-law 6 months ago in straight cash. We did repairs on it, made it beautiful, and now my contractor lives there. We have 4 units and it's been a great time. It's bringing in a lot of cash flow and I am looking to get into another property.

Now, I am looking at purchasing another potential multi family. It is a total project, the only thing that has been done is plumbing, electric, some duct work for AC, and the foundation and frame of the house. It's completely open and has support beams holding the structure up. We will need to do the flooring, dry wall, build the baths and kitchens, everything.

I have a few different options here I guess, wanted some feedback and possible guidance on some pros/cons.

1) I have been doing some research to try and find out how to possible get a HELOC on my rental property that I have now. If I could get a HELOC from that property, I would be able to purchase the second property in cash and pay for all the repairs in cash too, huge win.

I've been reading all over ,this is very difficult to do, as most banks and lenders will not give a HELOC off a rental property. I have read a few places about a cash out refi? Can somebody give some feedback on that? Keep in mind our current rental is 100% paid off.

2) Can I get a mortgage for this building while it is under construction? If so, I can get a small mortgage (purchase price is about 40-60k) and pay for all the repairs out of pocket no problem.

Any guidance/advice on how to leverage my currently rental property that is 100% paid off to purchase a second would be great, thanks guys.

Christos

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All Forum Posts by: Christos Philippou

Christos Philippou has started 13 posts and replied 115 times.

Post: My CAP Rate is WHAT?

Post: My CAP Rate is WHAT?

Post: My CAP Rate is WHAT?

Post: My CAP Rate is WHAT?

Post: HELOC/Purchase guidance needed.. under construction