Investor · Unknown · Member since 2016 · 28 posts · 4 votes
I know I know this has been asked a ton of times before, however, in the current market, what are some realistic cap rates for fully turn key (managed) properties (multi units/apartment block) one could achieve as an out of town investor in a relatively safe neighborhood with say $1m in cash to put towards a property? Is 10% achievable?
I live in LA and the prices and cap rates are not beginner investor friendly so I am considering looking in other states (mid west, Texas etc..)
As I do not have access to the MLS the good deals are impossible to find as a newbie. I'm sure many here feel the same and can feel alienated from the fact that we're competing against the big boys, banks, buy and hold investment groups etc.. and don't want to end up buying a "pig with lipstick"
Would I have more luck finding some colleagues on here to achieve finding a 10+ cap rate or scouting endlessly on Redfin/Loopnet for properties? Going to auctions?
The market largely does not value SFRs based on the ability to collect NOI. The ability to collect NOI is not a determining factor, in how most SFRs are priced. Rather it is the use of comps, and the perceived value to an owner-occupier.
You can't use CAP rates in estimating the sale price of SFRs.
But if you are a buy-and-hold investor, you can absolutely use CAP rates in determining their relative value to you. As the value to you (valuing cash-flow, rents,related) is different then the value the market largely applies (comps, perceived owner-occupier value).
The statement of "You can't use cap rates for SFR's" is not even worth evaluating, if you don't or won't qualify what one might be using the CAP rate calculation for in the statement.
The logic of "CAP rate is a useless metric for SFRs in any context" combined with the logic of "NOI's of similar will sell for generally the same cap rate" absolutely floors me LOL. If CAP rate dictates sales price, it's an incredibly useful metric in determining sale price for SFRs. If CAP rate does not dictate sale price or value of SFRs, it's an incredibly useful metric in the valuation of a property to a buy-and-hold investor making money on rents.
Either way, it is certainly very useful in one case or the other, as you have actually stated in your previous posts.
To state CAP rate is irrelevant, is to state that NOI and property value are irrelevant (since CAP rate is simply the raio of the two).
Are you actually trying to argue that the NOI and purchase price of a property, or the ratio between the two, are irrelevant (with single-family properties)? Because they are the definition of CAP rate! How on earth could these two critical pieces of data on a property (net operating income, or the price or value off a property) or their ratio possibly be irrelevant?
If you'd like to ignore the net operating income, and price or a property (or the ratio thereof) when purchasing a single family residence, feel free. I certainly would not recommend that though. I'd think it would be most important for most investors to have a firm handle exactly what the NOI and price of their properties are, as well as the ratio therein.
The logic of "CAP rate is a useless metric for SFRs in any context" combined with the logic of "NOI's of similar will sell for generally the same cap rate" absolutely floors me LOL. If CAP rate dictates sales price, it's an incredibly useful metric in determining sale price for SFRs. If CAP rate does not dictate sale price or value of SFRs, it's an incredibly useful metric in the valuation of a property to a buy-and-hold investor making money on rents.
Either way, it is certainly very useful in one case or the other, as you have actually stated in your previous posts.
To state CAP rate is irrelevant, is to state that NOI and property value are irrelevant (since CAP rate is simply the raio of the two).
Are you actually trying to argue that the NOI and purchase price of a property, or the ratio between the two, are irrelevant (with single-family properties)? Because they are the definition of CAP rate! How on earth could these two critical pieces of data on a property (net operating income, or the price or value off a property) or their ratio possibly be irrelevant?
If you'd like to ignore the net operating income, and price or a property (or the ratio thereof) when purchasing a single family residence, feel free. I certainly would not recommend that though. I'd think it would be most important for most investors to have a firm handle exactly what the NOI and price of their properties are, as well as the ratio therein.
Cap rate COMPS are used by professionals that have access to them from reliable third parties. It is near impossible to get a cap rate comp for SFR's. I've been asking for years on this very forum and no one has been able to produce one. Can you?
Again, you are doing it backwards because you are committing to a price/value prematurely. The CORRECT way to use cap rates is to get cap rate comps from closed sales and use that against the NOI to get value.
You are failing to address the 5% 10% example I gave earlier. If you can understand that then you'll realize you are doing it backwards.
With a 1 Million dollar buy in, your approach should be different than mine. This is all just my opinion of course: Only buy A graded neighborhoods. Find one or two GOOD turnkey companies. Mix what you are doing. 7 SFR and 3 MFR, etc. Be really picky about what you like: Cash flow, equity, niceness of property, appreciation potential, etc----whatever it is YOU are picky about. You have a big buy in, so I would be choosy. I have a low buy in, so leave the daredevil stuff to people like me ;). High buy in, lower risk taking. Lower buy in, higher risk taking. Best of Luck !!!!!!
@Matt R. for purposes of comparing similar properties to each other, whether SFR or multi, the CAP rate can be a useful rule-of-thumb type metric. You may choose not to apply them to single family homes, but that doesn't mean the metric is entirely useless or for some reason entirely irrelevant.
In your post you say "For example, the top 3 cities in the nation since 2000 for SFR total returns are LA,SF and San Diego." I feel confident saying your vague term "total returns" is less useful then CAP rate, which at least has a generally understood and accepted definition, NOI / asset value (or price).
Right on John. Total returns as measured by Corelogic in this case is equity gain plus cash flow equals total returns. Results may vary.
The logic of "CAP rate is a useless metric for SFRs in any context" combined with the logic of "NOI's of similar will sell for generally the same cap rate" absolutely floors me LOL. If CAP rate dictates sales price, it's an incredibly useful metric in determining sale price for SFRs. If CAP rate does not dictate sale price or value of SFRs, it's an incredibly useful metric in the valuation of a property to a buy-and-hold investor making money on rents.
Either way, it is certainly very useful in one case or the other, as you have actually stated in your previous posts.
To state CAP rate is irrelevant, is to state that NOI and property value are irrelevant (since CAP rate is simply the raio of the two).
Are you actually trying to argue that the NOI and purchase price of a property, or the ratio between the two, are irrelevant (with single-family properties)? Because they are the definition of CAP rate! How on earth could these two critical pieces of data on a property (net operating income, or the price or value off a property) or their ratio possibly be irrelevant?
You're right - every property has an NOI and a purchase price (or value). So, every property has a ratio between them. Of course they're both important, and so the ratio is as well.
The problem is that the term "CAP Rate" was already reserved amongst the professional commercial real estate and finance folks to mean ~"The going rate that a market will pay for property income at a given risk level."
So, when we try to steal the term "CAP Rate" and apply it to mean ~"How good of a deal I found," we're ... not being respectful of how the term is used in other circles.
I can co-opt any word and claim it has a different definition ... but if my goal is to be understood by the largest group possible and avoid mis-communication, I'm better off not using terms in ways that professional associations discourage.
And, yes, this is definitely a first-world problem. <grin>
While some may choose to define CAP rate as "the going rate that a market may pay for a property" and @Account Closed will try to tell you about "the CORRECT way to use cap rates".........the literal definition of a CAP rate is NOI / Sales Price. If you want to apply another definition, or feel the need to further restrict the previous definition, feel free. I don't see any benefit in doing so.
Personally, I'm not worried about one persons definition of "the correct way" to use cap rates (especially when they then say they correct way is useless in the subject case of SFRs). I'll stick to the literal definition, and continue calculating CAP rates as one of many criteria that help me understand which properties may have be superior to others (or which properties deserve running a deeper analysis on).
But you are doing it backwards and look like a fool in a professional environment.
PLUS , you still cannot show how it is functional in any way since you have to have a SOLD price to do your simplistic math. After a property is sold it is too late to make a decision based on the cap rate. See, you screwed yourself by doing it backwards.
@Account Closed you may think I am doing it backwards. Or there may be lots of professionals that use a literal definition of the term CAP rate, and use their likely purchase or max offer price (which is someone elses SOLD price) to run the calculation. One parties purchase price, is the other parties sale price.
I'm not sure if this simply a regional definition issue or what, but I know plenty of long-time investors with hundreds of doors that calculate the CAP rate on a yet-to-be-purchased property as NOI / offer price, or NOI / max offer price, or NOI / likely sale price, so as to get a measure of the attractiveness of the property to them.
I'm fairly well networked. In my circles in the Baltimore area, south FL area, a few markets in northern and southern CA, across many investors with 20+ years experience and hundreds of doors each, calculating the likely CAP rate of a potential purchase (NOI / expected or max or acceptable sale price) to compare the attractiveness of one potential purchase to another is commonplace.
If this is a "mis-use" in your eyes, I guess we'll just have to agree to disagree. I suspect you still calculate NOI / acceptable or expected purchase price, and use that criteria to evaluate properties you are considering purchasing......although perhaps you choose not to call that a CAP rate like some others do.
So if someone wants to buy at a specific cap rate "so as to get a measure of the attractiveness of the property to them." ALL they have to do is divide each properties NOI by their "attractive" cap rate and then ALL properties are "attractive"! IF the seller is willing to take that price. See how simple the process is if you don't do it backwards. Doing it backwards means you exclude every property where the seller failed to price correctly.
Alright then, it couldn't be possible that other people use/define the term differently then you. Everyone that doesn't agree with you is definitely wrong, and doing it "backwards".
And for reference, I don't necessarily exclude properties based on the ratio of their NOI/Asking price, but I do use NOI/list price as a metric to determine which properties I am more likely to make an offer on or consider, or have a better chance of having an offer accepted on. The closer the NOI/asking price is to my target, the less I have to negotiate.
Alright then, it couldn't be possible that other people use/define the term differently then you. Everyone that doesn't agree with you is definitely wrong, and doing it "backwards".
And for reference, I don't necessarily exclude properties based on the ratio of their NOI/Asking price, but I do use NOI/list price as a metric to determine which properties I am more likely to make an offer on or consider, or have a better chance of having an offer accepted on. The closer the NOI/asking price is to my target, the less I have to negotiate.
John D I am recognized by the state of CA as an expert witness to testify on all aspects of real property valuations including cap rates. I have also valued over $40,000,000,000 of real property.
You said "I do use NOI/list price as a metric to determine which properties I am more likely to make an offer on or consider" HOW? If the number comes out as 5, or 10 or 8 what the heck does that mean? NOTHING!
As an expert witness, you may certainly have a different technical definition of a term, then many of the rest of us use. I congratulate you on your recognition by the state of CA as an expert witness -- and $40bil, you certainly have valued a lot of property. I suspect it's the fact that you are an expert in valuation, and the fact that you have run valuations on so much real estate from an expert witness perspective, that leads us to our difference in the use (and possibly definition) of the term. I think we both agree CAP rate is a meaningless metric to value a SFR, if one is testifying as an expert witness in court, as it is not the metric by which value is primarily derived from when it comes to SFRs for the market as a whole. That doesn't mean for an investor, the ratio of NOI/price for prospective deals is useless.
If the number comes out a 10, and the property meets the rest of my criteria, it means I have a much greater chance of purchasing that property at a price that is acceptable to me, then a property that comes out as a 5. The number is an indicator of my likelihood of closing a deal that is acceptable to me, again assuming these properties meet my other criteria. The number is an indicator of how close the value of the property to me, aligns with the sellers asking price.....and naturally price alignment is a core component the likelihood of getting deals done.
If the number comes out a 10, and the property meets the rest of my criteria, it means I have a much greater chance of purchasing that property at a price that is acceptable to me, then a property that comes out as a 5. The number is an indicator of my likelihood of closing a deal that is acceptable to me, again assuming these properties meet my other criteria. The number is an indicator of how close the value of the property to me, aligns with the sellers asking price.....and naturally price alignment is a core component the likelihood of getting deals done.
Why 10? What if properties were actually selling at 12%? Then you'd be overpaying and your incorrect use of cap rates would have been for nothing. And if 10% is your magic number then just make all offers at 10%.
SFRs do not sell at and are not valued by the market according to CAP rates, as you stated, so SFRs often sell at different CAP rates.
I have a limited amount of time, and my time has value. If there are 5,000 SFRs that meet my target criteria, in my target area, I won't bother to make 5,000 offers at 10%. I might take the 50 SFRs that meet my target criteria with a 9% threshold, and make offers at 10% on those. Said another way, I might filter all properties that meet my criteria, for a NOI/list price of 9%+, and only make offers on those, so as not to spend lots of time writing offers on places where my acceptable purchase price differed greatly from the asking price.
Many investors first use GRM (using listing price as the price in the formula) to filter out properties they don't want to consider that don't hit a minimum GRM, then use a quick estimate of NOI/listing price, to further filter properties that don't hit that minimum ration, and then dig into further details to arrive at an offer price for the remaining properties.
SFRs do not sell at and are not valued by the market according to CAP rates, as you stated, so SFRs often sell at different CAP rates.
I have a limited amount of time, and my time has value. If there are 5,000 SFRs that meet my target criteria, in my target area, I won't bother to make 5,000 offers at 10%. I might take the 50 SFRs that meet my target criteria with a 9% threshold, and make offers at 10% on those. Said another way, I might filter all properties that meet my criteria, for a NOI/list price of 9%+, and only make offers on those, so as not to spend lots of time writing offers on places where my acceptable purchase price differed greatly from the asking price.
Many investors first use GRM (using listing price as the price in the formula) to filter out properties they don't want to consider that don't hit a minimum GRM, then use a quick estimate of NOI/listing price, to further filter properties that don't hit that minimum ration, and then dig into further details to arrive at an offer price for the remaining properties.
As @Justin R stated above every property has a NOI AND a cap rate once it is sold. And similar SFR's in the same market will have very similar cap rates. The problem is that there is NO RELIABLE source of analyzed cap rates for SFR's because it is not profitable for a third party to provide that service because sales comps do a better job of supporting value. If you ask anyone for local SFR cap rates if they actually give you a number ask them for the cap rate comps they have to support that. They won't have anything but possible what cap rates THEY bought at but they probably couldn't figure out the CORRECT NOI. "Well that's my NOI not counting management or vacancy, etc." That's a CRAP rate.
If your time is valuable why calculate crap rates on even 50 properties "asking price" when you can just make your 50 offers or your percentage of those at your "special selected cap rate". Can you NOT see how much more efficient that is?
AND WHERE THE HELL ARE YOU GETTING 50 NOI'S ON SFR's? Seriously?
You said, "Many investors first use GRM (using listing price as the price in the formula) to filter out properties they don't want to consider that don't hit a minimum GRM" These investors are using GRM's BACKWARDS! First listing prices are a joke. Most properties don't sell at listing price. Geez! The correct and efficient way to use GRM's is to calculate the market GRM. Easy if you know your market rents and sales prices. So if your SFR's are selling at say 15 times rent then JUST MAKE YOUR OFFERS BASED ON 14-15 TIMES RENT. See how that is SO much easier than doing it backwards. Did you learn the incorrect way from a Guru?
I'll do it my way, you do it yours. CAP rates can vary more dramatically for SFRs (moreso then multi), as the differences between different SFRs impact the sale vs. market rent price differently (since the majority of buyers are not investors). Do a cosmetic rehab on a house, and the market sale price will likely increase greater as a percentage, then market rents will increase as a percentage. Similarly, some features of a house have a much higher impact on either the value of the home, or the rental rate of the home. Because of this, CAP rates vary. Literally across the road from where I sit today in Boynton Beach FL, there is a home worth $300k that would rent for $1,200 and a $300k home that would rent for $1,500. The $1,200/month home is more updated, and has less square footage (and appeals more to purchasers then renters, relatively speaking). The $1,500 home is less updated, but has more square footage and bedrooms (and therefore appeals more to renters then purchasers, relatively speaking). These are similar homes, but the small differences cause them to have different appeal to different audiences (renters vs. purchasers), which cause significant differences when one calculates the CAP rate of each.
Sounds like everyone but you is doing it backwards. If you won't even recognize that filtering properties based on GRM using listing price, I have no interest in continuing the conversation That's the most common method of taking a list of thousands or tens of thousands of properties, and figuring out which ones to further research.
Listing prices are not a joke, they are a representation or approximation of what the seller believes his property his worth, or what he would sell the property for, or some similar sentiment. If the listing price is close to what the property is worth to me, I have a much greater chance of making a deal. If a listing price is way, way off of what a property is worth to me, I have a very small chance of making a deal, and therefore I filter these out.
I'm done here. You may be an expert on valuation in a court scenario, but if you think the listing price is irrelevant to your likelihood of closing a deal, and think filtering down a list of many thousands of properties using GRM to make a target list has no merit......well, I just don't know what to say.
And hey, if I'm doing it backwards, well so far so good, I'll continue to do it that way. It's worked really, really well for me.
And hey, if I'm doing it backwards, well so far so good, I'll continue to do it that way. It's worked really, really well for me.
How? You have continued to ignore the specific questions I have asked that will show you that you are doing it incorrectly. You obviously don't want to learn and if being an uneducated investor is what is important to you then have at it. My post are mainly for investors that want to learn.
1, I realize you can't tell me where you are getting the NOI's of the 50 properties you are "analyzing".
2. I realize that you can't explain why a NOI will sell for twice as much in some markets.
3. I realize you can't tell me how you "know" a property is profitable at a 9%, 10% etc. cap rate.
@Account Closed @John D. we know that Cap rate is not used on Resi.
I sure would be a benefit to all the BP folks if you would right a white paper or a long post or a blog post on why that is from your expert opinion... I know I would like to hear from you more detail and technical reasons why.
@Jay Hinrichs is it that calculating an estimate of NOI and dividing it by the asking price or likely sale price of a property is not useful? Or is that that is not how you define CAP rate? To perhaps remove some ambiguity from the conversation:
A) When considering purchasing a property, and deciding between multiple properties, estimating NOI and dividing that by the likely/estimated or asking sales price, is not useful.
B) Doing what is proposed in (A) above is useful, but that is not a CAP rate calculation, under your definition.
Perhaps by isolating which of these statements represents your argument, I can get a clearer picture of where the disconnect is.
1, I realize you can't tell me where you are getting the NOI's of the 50 properties you are "analyzing".
--I am estimating the NOI. By estimating the gross rents, vacancy, and expenses, based on the attributes of a property, one arrives at an NOI estimate. Some NOI estimate is better then none. Unless you are advocating buying rentals without looking at NOI.
2. I realize that you can't explain why a NOI will sell for twice as much in some markets.
--I can, and did, explain why some NOI will sell for more. It is because the value is primarily set by people that ignore NOI (owner occupants) and therefore price is not pegged to NOI. It is also because variances in a property impact owner occupants (impacting sale price) differently then renters (impacting market rent).
3. I realize you can't tell me how you "know" a property is profitable at a 9%, 10% etc. cap rate.
--CAP rate is an indicator of profitability, not an absolute determinent. With similar properties, one with a 10% CAP rate is more likely to be "profitable" as a rental then one with a 5% CAP rate. It's certainly not an absolute though, more a rule-of-thumb that can help some people ascertain which opportunities may bear more research, and which may not.
@Account Closed @John D. we know that Cap rate is not used on Resi.
I sure would be a benefit to all the BP folks if you would right a white paper or a long post or a blog post on why that is from your expert opinion... I know I would like to hear from you more detail and technical reasons why.
Oh geez Jay. Thanks for the call out! How bout we double publish. Me on cap rates and you teaching us how to fly one of them airplanes. LOL... I have contemplated doing exactly that but you realize I am retired and lazy. You saw my post about the SF median price going from $670,000 in 2012 to $1,120,000 this month? Don't tell @Ben Leybovich. He just sees the appreciation and doesn't give credit for the hard work of selecting and acquiring and keeping the property. Shoot, even the median priced condos in Honolulu are up $30,000 just since the first of the year. Mine are up even more.
My plan was to do a blog or a separate thread so that all I have to do is cut and paste each time someone appears to have trouble with the concept. Dang that's work. I also get pleasure when I'm doing my cap rate cop posts when someone, possibly not even the person that is posting contacts me and tells me they had their ah ha moment when they totally understand it from my posts. That's what has kept me continuing my posts after I'm almost ready to give up.
But you realize a good 80% of the posters here think the definition of NOI is 50% of GSI. There are books written just about operating expenses and how to analyze them. Where would I start with people that think Rent at 2% of the purchase price is a goal when it really just means that the possibility of the rents or a profit is weak so the purchase price is low. Duh. Don't start me on people that think appreciation rates are magic and paper cash flow is guaranteed.
It would be much easier to do in a question answer format. I'm not sure how best to implement that.
So sure Jay, Coming Soon in a post near you, the Cap Rate Cop tells all.
1, I realize you can't tell me where you are getting the NOI's of the 50 properties you are "analyzing".
--I am estimating the NOI. By estimating the gross rents, vacancy, and expenses, based on the attributes of a property, one arrives at an NOI estimate. Some NOI estimate is better then none. Unless you are advocating buying rentals without looking at NOI.
John D please do not take this as an attack. I really would like you to understand this. As I wrote above there are books on just analyzing operating expenses. What operating expense categories do you use? NOI is NOT an estimation but a thorough analysis of each category against similar properties. Where would you get that information? If you are just guesstimating then you will get a crap rate. Above you just say expenses. Do you know the difference between that and operating expenses? I am advocating against buying rentals with guesstimated operating expenses since that distorts NOI which distorts cap rates. Just a $1,000 guesstimate wrong on operating expenses of just $10,000 distorts the property value by 10%. That's not even horseshoe close. Lesson, NOI is too important to guess at whether you are using a cap rate or not.
2. I realize that you can't explain why a NOI will sell for twice as much in some markets.
--I can, and did, explain why some NOI will sell for more. It is because the value is primarily set by people that ignore NOI (owner occupants) and therefore price is not pegged to NOI. It is also because variances in a property impact owner occupants (impacting sale price) differently then renters (impacting market rent).
Similar properties in similar locations will sell at similar cap rates. I believe you used a property on a busy street as an example. That property will likely not sell at the same price as an identical property in a better location as the GSI will probably be lower and vacancy will be higher. But it's cap rate comp would be similar property impacted by similar negative surroundings. You can have two practically identical office buildings but the one in the CBD will have a lower cap rate because it will be more desired. You would not use them as comps for each other.
