What Cap Rates would make the property attractive?

8 Replies

Cap Rates and GRM (Gross Rent Multiple) set the stage for pricing a property. As interest rates decline, Cap Rates tend to go down and GRM tends to go up., and the pricing of the Multi-family apartment reflects this. I live in the pricey San Francisco Bay Area and find Cap Rates to be well below 5% and GRM to be above 15. Question for people buying in other areas of the country - what constitutes a good Cap Rate and GRM for you to buy?

Originally posted by @Arun Iyengar :

Cap Rates and GRM (Gross Rent Multiple) set the stage for pricing a property. As interest rates decline, Cap Rates tend to go down and GRM tends to go up., and the pricing of the Multi-family apartment reflects this. I live in the pricey San Francisco Bay Area and find Cap Rates to be well below 5% and GRM to be above 15. Question for people buying in other areas of the country - what constitutes a good Cap Rate and GRM for you to buy?

Arun,

It depends. If you're a multi-family flipper, lower cap rates maybe more attractive. If you're a buy-and-hope investor for cash flow, then higher cap rates maybe more attractive. 

Let's take a look at an example. For a market trading at 3.3% cap, every $1 increase in NOI, the value of the asset goes up 3 times. For a market trading at 10 cap, the value of the asset goes up 1 time for every $1 increase in NOI.

I've been playing in the San Jose market where the market is trading around 4.5 cap with 13.x - 14.x GRM. If you can force the rents up between $3k-$5k/mo/building, you're looking at $500k-$900k in equity capture. Just do one to two buildings a year and you're sitting pretty. This can be accomplished on 6- to 10-unit buildings. How many units do you have to own and how long does it take for you to get that kind of cash flow owning high cap rate buildings?

Breaking into the multi-family arena in the Bay Area is quite difficult, but the rewards are there for those who can make it.

Just some food for thought.

Originally posted by @Minh Le :
Originally posted by @Arun Iyengar:

Cap Rates and GRM (Gross Rent Multiple) set the stage for pricing a property. As interest rates decline, Cap Rates tend to go down and GRM tends to go up., and the pricing of the Multi-family apartment reflects this. I live in the pricey San Francisco Bay Area and find Cap Rates to be well below 5% and GRM to be above 15. Question for people buying in other areas of the country - what constitutes a good Cap Rate and GRM for you to buy?

Arun,

It depends. If you're a multi-family flipper, lower cap rates maybe more attractive. If you're a buy-and-hope investor for cash flow, then higher cap rates maybe more attractive. 

Let's take a look at an example. For a market trading at 3.3% cap, every $1 increase in NOI, the value of the asset goes up 3 times. For a market trading at 10 cap, the value of the asset goes up 1 time for every $1 increase in NOI.

I've been playing in the San Jose market where the market is trading around 4.5 cap with 13.x - 14.x GRM. If you can force the rents up between $3k-$5k/mo/building, you're looking at $500k-$900k in equity capture. Just do one to two buildings a year and you're sitting pretty. This can be accomplished on 6- to 10-unit buildings. How many units do you have to own and how long does it take for you to get that kind of cash flow owning high cap rate buildings?

Breaking into the multi-family arena in the Bay Area is quite difficult, but the rewards are there for those who can make it.

Just some food for thought.

 Minh,

Thanks for your reply. I have been an investor in San Jose for a few years with multi family buildings. The recent passage of rent control in San Jose has put a damper on my ability to acquire properties and get them from below market to market rents.

Hi Arun,

You can buy properties @ much better cap out of state (I operate mostly in TX).

Also, the law and regulations are much more landlord friendly...

Sounds like you are interested in MF. I host a meetup in Los Gatos which is dedicated mostly 

to apartments out of state investing.

Feel free to check it out:

meetup.com/Los-Gatos-Real-Estate-Networking-Meetup/

Originally posted by @Boris Liubovitch:

Hi Arun,

You can buy properties @ much better cap out of state (I operate mostly in TX).

Also, the law and regulations are much more landlord friendly...

Sounds like you are interested in MF. I host a meetup in Los Gatos which is dedicated mostly 

to apartments out of state investing.

Feel free to check it out:

meetup.com/Los-Gatos-Real-Estate-Networking-Meetup/

Thanks Boris. I just did check that out and you seem to meet once a month, with the next one in end June - correct?