Investor · Los Angeles County, CA · Member since 2012 · 962 posts · 279 votes
I'm looking into NELA Northeast Los Angeles, Downtown Los Angeles outskirts, and Long Beach for Cap Rates and expense rates.
What do investors look for in CAP rate for Northeast Los Angeles, or Long Beach? For example how might one find the Cap rate for El Sereno, downtown Long Beach, or Lincoln Heights areas?
Anyone have examples of other metrics or criteria they use for acquisition in LA?
The trouble with getting accurate CAP rates is finding out the exact operating expenses of the property and accurate rents. Oftentimes, agents and Sellers fudge these numbers.
Another useful alternative metric to consider for multifam properties is GRM (gross rent multiplier). The GRM is obtained by dividing the property's sale price by its gross annual rental income however does NOT include factors such as utilities, taxes, maintenance and vacancies. It's basically another tool to determine whether the asking price of a property is a good deal.
What sources are you using for OPEX and rent numbers for your CAP rate calculations?
The trouble with getting accurate CAP rates is finding out the exact operating expenses of the property and accurate rents. Oftentimes, agents and Sellers fudge these numbers.
Another useful alternative metric to consider for multifam properties is GRM (gross rent multiplier). The GRM is obtained by dividing the property's sale price by its gross annual rental income however does NOT include factors such as utilities, taxes, maintenance and vacancies. It's basically another tool to determine whether the asking price of a property is a good deal.
What sources are you using for OPEX and rent numbers for your CAP rate calculations?
Cap rates are deal specific and is equal to NOI / Purchase.
The variables are:
GSI
expenses
and the purchase price
You have factual evidence on the PP, a stated GSI that needs to be validated and a nebulous set of expenses. That should lead you to question the apples-2-apples comparison of Cap rates.
Cap Rates are easily calculated for a property with the simple equation of NOI/Purchase Price = Cap Rate. The reliability of a Cap Rate for a given property is completely reliant on accurate underlying revenue and expense numbers that go into the NOI.
I think your question is how to determine what a Market CAP is for a town/region/neighborhood, so that you can back into what a fair purchase price is for a building (of course dependent on reliable NOI). For that, I would see what CAP rates similar buildings in the neighborhood are being listed at and actually sold for (MLS). CAP rate measures the risk tolerance the market has specific to neighborhood and building type. For instance, an investor will need a much higher return if they're purchasing a C+ building in a rough part of Long Beach (higher risk/reward) vs. an A building in Manhattan Beach (lower risk/reward). Once you determine what CAP rate the market requires for certain asset classes and neighborhoods, you have a baseline to distinguish between deals and dogs. I would also be comfortable enough with what typical rents and expenses for certain asset classes and neighborhoods ought to be. It's much easier to spot padded "proforma" numbers or operations that have suffered from mismanagement when you have an idea of what's realistic.
For finding cap rates, a commercial broker servicing the area you are looking at might be able to help you with data from recently sold properties. there are online sources available with this data, like Costar and Loopnet, but come at a cost.
Yeah my question was for the "general" market CAP rates of certain areas and neighborhoods within Los Angeles. But I'm also interested in what general rules investors are using currently for calculating CAP rates.
General or Market CAP rates for neighborhoods:
Like in Long Beach downtown area they tend to be CAPs below 5%. I don't really know off hand what they are in the NELA or Boyle heights area that people are seeking, but I assume it's around 5% for B-C buildings?
As far as specifically calculating CAP rates for specific properties:
I'm trying to calculate the CAPs on some multi units in LA. It's not an exact science as some buildings are 1930s some are 1970s. There's tons of variables as far as A-C buildings, rent control, cap ex, vacancy rates in different aras of LA (Then there's the mandated earthquake retrofit thing that I don't know how it could effect some of the buildings LATimes Earthquake Retro on Apts )
So for for quickly crunching CAP rates --for instance on an old 1930 building in Los Angeles, what do most of you use as expenses? I'd assume about 40% for expenses? Then on a newer 1950s building could I assume about 30% for expenses?
Then you have to factor in the costs of a 4 -6 unit vs the expenses of a larger property 12-20 units-- I assume expenses could go down with scale?
I am currently analyzing several multis from 4-20 unit properties that are built from 1910 up to 1980 so there are so many variables...
So if anyone has some tips or even "rules" as to more quickly analyze them?
Hi @Will F. we buy multifamilies in Long Beach and when we are running our rough numbers and analyzing sold comps in the area, we use 35% for expenses. Generally the comps are all fairly similar so using 35% across the board to get the exit cap comps gives us a pretty good idea.
We buy in A and B type hoods, cap rates are usually around 3.5%-4.5%. We determine it by looking at closed sales in the hood
Cap Rates vary and can be derived with numerous variables that impact the cash flow/purchase price formula. I would present that you should derive your own cap rate requirement and then apply it to cash flow to determine an offering price. For small income properties, try the "band of investment" formula below:
(Interest Rate on Debt X Loan to Value)+(Desired Equity Rate X Equity to Value) = Cap Rate
Example:
(6% interest rate x 80%LTV )+(10% equity yield X 20% equity) = Cap rate
or
4.8%+2.0% =6.80%
In the example, the 6.80% cap rate is one that meets your objective of a 10% cash on cash return. Do a google search on "band of Investment" cap rate analysis if you want more info.
For those of you who want to discuss (argue) the merits of this analysis, feel free to do so but this approach can be expanded to include other factors such as appreciation, amortization and even standard deviation. The point is that cap rate analysis is only one of many tools and you should not rely on just one tool in making an investment decision.
I find this "band of investment" analysis as a good tool for weeding out properties that will NOT fit my investment goals. In my example above, any property that would be below a 6.8% cap would be eliminated. If you find that you can not find any properties that meet your cap rate, you may need to reconsider your equity and debt factors. When it come to selling, this formula is irrelevant, since the market ie. each investor will set their own target.
The concept that there is only one number, is highly flawed and before you start making investments on that number, look at all the variables that go into determining cash flow first, then decide if the cap rate is appropriate. I would warn BP readers, that published cap rates are usually from institutional buyers and typically do not represent the investment formula of most small properties. Cap Rates from appraisers are typically derived from sales so that they reflect a historical prospective and are limited by available information on rents and expenses which may not be those used by the buyer.
Long winded and out of breath and do not not get me started on IRR.