Realistic turn key cap rates?

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?

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Jay HinrichsBusiness Member

Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes

10y

check out Bries turnkey reviews site.. lots of turn key companies advertsing actual deals.

8 to 12% seems to be the returns these days..

but if you have a million in cash I would be investing in your market.. were you have a great chance for appreciation over the holding period.

and or collaborating with developers and other movers and shakers you can make quite a bit in the right deal with that amount of cash

Like flips in the Hollywood hills Beverly hills etc

Podcast Guest on Show #222

JLH Capital Partners51 Review

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Account Closed
Investor · Honolulu, HI · Member since 2013 · 3k+ posts · 1k+ votes
10y
Originally posted by @John D.:

@Account Closed
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.
The ONLY reason a 5% cap rate property has a 5% cap rate is because the market thinks its NOI is MORE desirable. So your argument is that the less demand for a property there is the more profitable it will be. Seriously?
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Jason V.
Investor · Rochester, NY · Member since 2016 · 477 posts · 426 votes
10y
Originally posted by @Account Closed:

Originally posted by @Jay Hinrichs:
@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.
So I actually think it's really funny you mention the reason you keep posting is because people keep writing you to say they finally had their "Ah-Ha" moment about Cap Rates after reading your posts....because I was going to do that here!
To be honest, I've seen you get into it with a bunch of folks here on BP and thought to myself "Man, Bob can be kind of a jerk" - but I'm starting to finally get it (both your approach/attitude, and Cap Rates, I hope!)
Put my name on the long list of folks who want to see you and @Jay coauthor a blog about this.
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Account Closed
Investor · Honolulu, HI · Member since 2013 · 3k+ posts · 1k+ votes
10y
Originally posted by @John D.:

@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.
A correct. B is incorrect.
A, even if you in fact had the correct NOI it is meaningless without an actual sales price AND other sales of similar properties where the actual NOI was calculated against a closed sale.
B. Since A is not useful because it is not a correct calculation of cap rates.
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Jason V.
Investor · Rochester, NY · Member since 2016 · 477 posts · 426 votes
10y
@Account Closed And since you're taking requests for blog posts tonight....how about one about investing in Hawaii?
It's nice to dream! :-)
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Account Closed
Investor · Honolulu, HI · Member since 2013 · 3k+ posts · 1k+ votes
10y
Originally posted by @Jason V.:
Originally posted by @Account Closed:

Originally posted by @Jay Hinrichs:
@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.
So I actually think it's really funny you mention the reason you keep posting is because people keep writing you to say they finally had their "Ah-Ha" moment about Cap Rates after reading your posts....because I was going to do that here!
To be honest, I've seen you get into it with a bunch of folks here on BP and thought to myself "Man, Bob can be kind of a jerk" - but I'm starting to finally get it (both your approach/attitude, and Cap Rates, I hope!)
Put my name on the long list of folks who want to see you and @Jay coauthor a blog about this.
https://www.youtube.com/watch?v=UPw-3e_pzqU
Thanks Jason, I think.
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Account Closed
Investor · Honolulu, HI · Member since 2013 · 3k+ posts · 1k+ votes
10y
Originally posted by @Jason V.:

@Account Closed And since you're taking requests for blog posts tonight....how about one about investing in Hawaii?
It's nice to dream! :-)
It's on my Bucket List.
1 Reply
John D.
Rental Property Investor · La Quinta, CA · Member since 2014 · 1k+ posts · 779 votes
10y
@Account Closed 4155195039 is my cell. Give me a call. Let's chat. Might be easier in voice.
"NOI is NOT an estimation but a thorough analysis of each category against similar properties." By thoroughly analyzing each category against similar properties, you arrive at an informed estimate. We arrive at our estimates using the best available inputs. An estimate is better then nothing, in doing evaluation. And again, you just said it's not an estimation, and then said what data you used to make the estimation.
"A correct. B is incorrect.
A, even if you in fact had the correct NOI it is meaningless without an actual sales price AND other sales of similar properties where the actual NOI was calculated against a closed sale."
You just said A was correct, and then said it incorrect (meaningless). Let's talk about which it is.
I think some of the crux of our difference is related to the fact that you say "it is meaningless without an actual sales price AND other sales of similar properties where the actual NOI was calculated against a closed sale.". I don't think this is true. I estimate NOI using comparison properties I own, or other people own, that have not sold recently. And I can estimate a properties value using comps, even if they do not have an NOI calculations.
Anyways, I think we've come to the conclusion that debating here in this thread further is unlikely to help us in coming to a resolution. Give me a shout at a time that's convenient, and maybe we can better articulate or explain our relative points in voice.
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Account Closed
Investor · Honolulu, HI · Member since 2013 · 3k+ posts · 1k+ votes
10y
Originally posted by @John D.:

@Account Closed 4155195039 is my cell. Give me a call. Let's chat. Might be easier in voice.
. And again, you just said it's not an estimation, and then said what data you used to make the estimation.
John you made me look. I never said I used data to make a NOI estimation. Please show me where you think I said that, If I am buying a NOI I want to make sure I am buying an actual NOI and not some estimation.
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Account Closed
Investor · Honolulu, HI · Member since 2013 · 3k+ posts · 1k+ votes
10y
Originally posted by @John D.:

@Account Closed 4155195039 is my cell. Give me a call. Let's chat. Might be easier in voice.
You just said A was correct, and then said it incorrect (meaningless). Let's talk about which it is.
John here is your A
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.
I stated that you were correct that estimated NOI and estimated or asking sales price, is not useful.
A as stated by you is correct.
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Account Closed
Investor · Honolulu, HI · Member since 2013 · 3k+ posts · 1k+ votes
10y
Originally posted by @John D.:

@Account Closed 4155195039 is my cell. Give me a call. Let's chat. Might be easier in voice.
I think some of the crux of our difference is related to the fact that you say "it is meaningless without an actual sales price AND other sales of similar properties where the actual NOI was calculated against a closed sale.". I don't think this is true. I estimate NOI using comparison properties I own, or other .people own, that have not sold recently. And I can estimate a properties value using comps, even if they do not have an NOI calculations.
You are defining Cap rate = estimated NOI / estimated value.
I say Crap rate = estimated NOI / estimated value.
The REAL VALUE of a cap rate analysis is that an actual buyer and seller had a meeting of minds on what they were selling. They did the deed. They are NOT "what ifs lookie loos". And the actual event was analyzed by an independent third party that talks to the decision makers. So if a property was in need of near term cap ex then the sales price might include concessions that distort the sales price so if you are using the NOI against the reported sales price you have a distorted cap rate.
You and your friends are possibly the worst operators in your market. That means your expenses could very well be out of whack when compared to professional operators.
And again since all of you have the same expenses please list the categories you all use.
And what does your crap rate tell you? NOTHING!
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Account Closed
Investor · Honolulu, HI · Member since 2013 · 3k+ posts · 1k+ votes
10y
Originally posted by @John D.:

@Account Closed 4155195039 is my cell. Give me a call. Let's chat. Might be easier in voice.
Anyways, I think we've come to the conclusion that debating here in this thread further is unlikely to help us in coming to a resolution. Give me a shout at a time that's convenient, and maybe we can better articulate or explain our relative points in voice.
John, there is no need for resolution. I know what I am talking about. As I stated earlier I post because someone is "getting it". Maybe one out of 100 but that's progress. You may even look back at this once you ponder a bit more and go "ah ha". No shame.
If I was going to do personal calls I'd have to do those $5,000 calls for my expertise. It's here for free to all of you. I make it up in volume.
I do appreciate you hanging in there with minimal name calling and crying. LOL Happy to answer any question you have.
1 Reply
Stephen FrancoPro Member
Scranton, PA · Member since 2016 · 201 posts · 44 votes
10y
Most of my deals hover around 15%
1200/mo for a 2 unit rental
- 150/mo taxes
- 30/mo sewer
-50/mo insurance
-120 manangement
-120 maintenance pad
-120 vacancy pad
-610 net
=7320 annual
/ 50,000 purchase & rehab average for a double
=14.64
1 Reply
Ben Leybovich
Rental Property Investor · Phoenix/Lima, Arizona/OH · Member since 2012 · 4k+ posts · 4k+ votes
10y
Cap Rate can be very useful - but they can lie like little bitches when folks don't know what they are doing...lol
3 Reply
Andrew Noway
Real Estate Investor · Springfield, VA · Member since 2016 · 44 posts · 11 votes
10y
This fight right now between @Bob Bowling and @John D:
1 Reply
Erick Harbert
Real Estate Agent · Spring, TX · Member since 2015 · 109 posts · 25 votes
10y
We do SFR and Multifamily with partners and can expect 12-18%. Really depends on what and where you invest.
0 Reply
Account Closed
Investor · Honolulu, HI · Member since 2013 · 3k+ posts · 1k+ votes
10y
Originally posted by @Erick Harbert:

We do SFR and Multifamily with partners and can expect 12-18%. Really depends on what and where you invest.
1. How does 12-18% compare to the market rates?
2. How would you know market rates?
3. Why are the rates so high in today's economy? Are the rents that risky to collect or are the expenses so high that they eat up any profit?
4. Why is there such a large range in your market?
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Erick Harbert
Real Estate Agent · Spring, TX · Member since 2015 · 109 posts · 25 votes
10y
@Account Closed
1. As far as market for CAP 12-18% is a little higher. Most are selling on a 9-10 CAP in the great Houston market (but we also rarely buy turnkey unless a smoking deal.)
2. Loopnet, bank financing, buying units, selling units, and demand at different levels. Just a straight market rate is a blanket number. We look directly at each deal and only buy based on ROI and CAP expectations. If it meets them we go after the deal.
3. Right now you can buy a house in the hood around 30k do no work to it and will rent for 800 a month. After expenses you can get a 25% ROI. You can buy a nice house in a better area for 100k and will rent at 1400-1500 a month. We have an apartment complex https://www.biggerpockets.com/forums/517/topics/30... for sale right now that will run a 15-18% stabilized CAP (but by no means is this a good example of a turn key investment.)
4. Range is due to our buy criteria not due to market. We will make an exception on area if cash flow is strong enough. Or we will buy at a lower CAP or ROI if we expect better appreciation. This all really depends on your goals.
1 Reply
Andrey Y.
Specialist · Honolulu, HI · Member since 2014 · 1k+ posts · 1k+ votes
10y
Originally posted by @John D.:

@Account Closed
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.
I am ashamed that you being from CA, could make such an incorrect statement as you did your #3.
A 10% cap is likely to be more profitable than one with a 5% cap? That couldn't be further from the truth.
Did you read that 2015 report on the cities that were most profitable for landlords? I believe San Diego, San Francisco, Palo Alto, LA etc. were at the TOP. Those cities are known for notoriously LOW Cap rates!! I am talking like 3-4%. Yet they were the most profitable for landlords in the USA.
2 Reply
John D.
Rental Property Investor · La Quinta, CA · Member since 2014 · 1k+ posts · 779 votes
10y
@Andrey Y. You are ashamed of me? Not sure you know me that well, that you can make such a statement. I'm not from CA, nor do I live there (I'd prefer not to pay CA it's 12% income tax), although that is where the majority of my real estate interests are. In the context of the above conversation, profitability as derived by NOI estimates are operations profitability, and not necessarily inclusive of a later sale. I'll certainly agree that appreciation is large factor in the eventual profitability of a property, but given this thread was around CAP rates it's a bit of a departure from the conversation at hand.
If you would like to buy properties with the lowest CAP rates in CA and assume they will have the greatest appreciation, feel free. Personally, I continue to believe calculating the NOI of potential properties one is buying as a rental has value. But if there's a camp that thinks that calculating likely NOI, and comparing it to the list price or likely sale price is a poor practice, to each his own.
I continue to think it's ridiculous to say estimating NOI does one a dis-service, when evaluating SFRs. Others may choose to disagree. So be it.
1 Reply
John D.
Rental Property Investor · La Quinta, CA · Member since 2014 · 1k+ posts · 779 votes
10y
@Account Closed I too know what I am doing, although it seems likely we "do" different things. If you think I'll look back some day and say "aha, I was foolish to estimate NOI on those SFRs I was considering buying", well, that seems unlikely to happen.
I'll continue to estimate NOI on the properties I purchase, and so will the various other people that have posted NOI or cap rate measures in this thread, including Stephen Franco, Erick Harbert, Ben Leybovich, and various others. I'm good at estimating and drawing conclusions from like properties, I've done similar things in other industries successfully for 20 years. If you can't estimate NOI on prospective properties with a reasonable certainty (or within a defined confidence interval), doesn't mean I can't.
I just hope there isn't anyone just getting started that's listening too closely to you. Go out, buy a few SFR rentals, but heaven forbid you should estimate NOI, your doing it backwards! For gods sake, don't estimate rents/revenues or expenses! Those are horrible metrics, that makes no sense in SFR, estimating NOI, or it's ratio to the purchase price!
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Charles Lemelle
Punxsutawney, PA · Member since 2016 · 45 posts · 16 votes
10y
Originally posted by @John D.:
@Account Closed I too know what I am doing, although it seems likely we "do" different things. If you think I'll look back some day and say "aha, I was foolish to estimate NOI on those SFRs I was considering buying", well, that seems unlikely to happen.
I'll continue to estimate NOI on the properties I purchase, and so will the various other people that have posted NOI or cap rate measures in this thread, including Stephen Franco, Erick Harbert, Ben Leybovich, and various others. I'm good at estimating and drawing conclusions from like properties, I've done similar things in other industries successfully for 20 years. If you can't estimate NOI on prospective properties with a reasonable certainty (or within a defined confidence interval), doesn't mean I can't.
I just hope there isn't anyone just getting started that's listening too closely to you. Go out, buy a few SFR rentals, but heaven forbid you should estimate NOI, your doing it backwards! For gods sake, don't estimate rents/revenues or expenses! Those are horrible metrics, that makes no sense in SFR, estimating NOI, or it's ratio to the purchase price!
Don't mind me. I'm still trying to figure out who would want a vacation rental in Coachella Valley ?!?!?!?..............LOL. I'm just yanking your chain John. Rock on with your Festival self !!! My sister actually lives in your area. She told me the temps are getting hot. Kind of like your posts. I think your point is correct though. If you are interested in any property, take the minutes out to completely vet the numbers out. All numbers, and all calculations that you can lay your hands on. If the numbers tell you to still be interested in the property-then you should be good to go at that point. Now you have combined your instinct WITH your brain power. That's a great combo.
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John D.
Rental Property Investor · La Quinta, CA · Member since 2014 · 1k+ posts · 779 votes
10y
@Charles Lemelle Appreciate the input. My last purchase down near the festivals will do $250k+ in gross vacation rents annually, on just over $1mil purchase price + rehab + furnishing. That market is definitely heating up! If goldenvoice does 4-5 big events per year as they've contracted, I'll gross closer to $350k annually.
While there is certainly unique risks associated with vacation rentals, and this area given the concentration of revenue, given Indio is named the City of Festivals and given the goldenvoice contract goes through 2030, it's a risk I am willing to take.
How often do you find 2-3% rule properties, that are A props in B neighborhoods? I've even got a use conversion that will be an A prop in an A neighborhood without concentration risk, that will gross $200-$250k annually, that will require just under $1mil all in.
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Charles Lemelle
Punxsutawney, PA · Member since 2016 · 45 posts · 16 votes
10y
Originally posted by @John D.:

@Charles Lemelle Appreciate the input. My last purchase down near the festivals will do $250k+ in gross vacation rents annually, on just over $1mil purchase price + rehab + furnishing. That market is definitely heating up! If goldenvoice does 4-5 big events per year as they've contracted, I'll gross closer to $350k annually.
While there is certainly unique risks associated with vacation rentals, and this area given the concentration of revenue, given Indio is named the City of Festivals and given the goldenvoice contract goes through 2030, it's a risk I am willing to take.
How often do you find 2-3% rule properties, that are A props in B neighborhoods? I've even got a use conversion that will be an A prop in an A neighborhood without concentration risk, that will gross $200-$250k annually, that will require just under $1mil all in.
Holy Hot Springs !!!! 250k-350k gross rents ?!!?!?!?! You're like that Shiek of the Desert !!!! Congrats on your deal !!!! That's awesome. I knew just by lookin at festival costs to attend that somebody was scoring on the rentals, like big time. Well done. We share the same "guts". I see the down side. If those festivals go away, you could dry up faster than a water hole in the desert. I like that you took the risk anyway. No guts no glory. Or, no digging no water. Whichever. ;)
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John D.
Rental Property Investor · La Quinta, CA · Member since 2014 · 1k+ posts · 779 votes
10y
$30-$40k per week during festivals, for high end properties within a couple miles of the site. Holy hot springs indeed lol. I'm working at back-filling with normal vacation rentals, wedding, and corporate events so if the festivals go away, I'll still be in the green. I've had some great feedback from weddings in the 100-200 person size, I need to find the right person to put in charge of that initiative, but with a bit of seasoning and reputation, I can likely do 15+ of those a year at $8-12k+ per weekend.
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