Super Low Price? Double Digit Cap Rates? Hello Common Sense.

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Before we get goin’ today, we all know there are exceptions to every rule. ‘Course, if we’re to believe so many out there, their portfolio is chalk full of those exemplary exceptions. Yeah, and the Padres and Chargers are gonna be champs this season. I realize this and empathize, as I’m not exempt myself. I know, cuz I’ve seen me do it. Since my first purchase back in the mid-1970’s I’ve lost three properties, the last on in the mid-1980’s. Two of those came as a direct consequence of thinkin’ everything I wanted to buy was the exception to the rule. Know what’s worse than that brand of arrogance? Ignorant arrogance — and by a mile.

Early on I was the poster guy.

Back in those days I was a walking contradiction. On one hand my training was OldSchool to the extreme — in fact today I consider it priceless. On the other hand, my inclination to think I was sometimes wiser than my mentors overtook my ability to see the obvious. Does the phrase, punk know-it-all ring a bell? I paid the price though, in spades. Losing two properties in successive years is, um, somewhat humbling. This is especially true when your mentors rub it in mercilessly for several years.

What I learned.

Many things, but one stands out head ‘n shoulders above them all.

If the price is so good, or the cap rate so dang high, why isn’t everyone buying up everything in that area? Why didn’t it sell in a day or two? Could it be that the price must be that low to attract buyers? Same with the high cap rate? πŸ™‚

Ever seen an A+ location where you could buy a 20 unit apartment building at an 12% cap rate? No? Me neither. And why is that, pray tell? Could it be that due to the quality of the location, tenants, etc., that the sellers don’t need to bribe the market? While you’re braggin’ about that 12% cap rate, why don’t you also talk about how the NOI ain’t exactly what you predicted? That in reality the actual cap rate, the, you know, real life version, is actually single digit. That the tenants are a giant pain in the ass, your operating expenses are far more than expected, and your vacancy rate is off the chart.

But for that moment in time, when it closed? It looked like you were a genius — at least on paper. After a period of time, more or less for different people, you begin to have a very focused understanding about why the seller let you ‘run all over’ him when negotiating the sale.

Barnum said one was born every minute. I can say that cuz I used to be one. In fact, as Dad was way too fond of sayin’, ad nauseum, that I musta been born twice. Lord he could be brutal at times. πŸ™‚

Properties don’t sell at cartoonish discounts and/or stoopidly high cap rates cuz they’re in such high demand. They do so cuz the owners have been forced to do so due to massive market apathy. As soon as you buy it, you’ve turned yourself into that seller — and he’s elated.

For those who’re gettin’ red-faced reading this, don’t bother arguing. I know, all your stuff is in the ‘exception to the rule’ category. I’m generalizing, blah blah blah.

In fact, you’re no doubt half right. I’m definitely generalizing. But, generally speaking, very few real estate investors are so exceptional that their portfolio contains multiple income properties in excellent areas AND were bought with the above mentioned prices/cap rates in place.

Try to recall how long the last great deal you closed was on the market before you came along. If it was more than a week or so, how ‘great’ was it really? It lasted a month or two, yet you were the first to see the ‘hidden’ gold? Seriously? Everyone else missed it?

Bottom line: Most of those insanely priced investments with the off-the-chart cap rates, are that way cuz the demand simply doesn’t exist — till you came along. Sorry to be so blunt, but it is what it is.

I learned the hardest way. Learn from my pain, not your own.

About Author

Jeff Brown

Licensed since 1969, broker/owner since 1977. Extensively trained and experienced in tax deferred exchanges, and long term retirement planning.


  1. This is typical realtor talk aimed at talking up the sales price of a property (i.e., lowering the expected cap rate) to a potential buyer so that the agent can quickly get his commission and move on. Real estate agents would like everyone to think that there are no “deals” in the market price, that looking for them are a waste of time, and therefore one should quickly pay a higher price and buy the property in their listing. The plain truth though, is that there are “deals’ out there and some very motivated sellers. REO properties and short sales are prime examples of motivated sellers dumping their properties at below market value in order to get out of an investment that doesn’t match their particular portfolio requirements. The plain truth, is that good deals with high cap rates CAN be found. It just takes a little longer and a little more effort. But both of those words are not what a realtor wants to hear.

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