Advice Needed: Cap Rates & GRMs in Los Angeles

Multi-Family and Apartment Investing
13yFollow

Advice Needed: Cap Rates & GRMs in Los Angeles

Tevis Verrett
Lender · Woodland Hills, CA · Member since 2013 · 364 posts · 115 votes

Blessed Sunday Morning to My BP Brethren and Sistren.

I am gettting re-started in Real Estate and doing my research to rebuild my empire (dreaming, dreaming). But I digress.

I have gotten my grocery money together, lined up my partners, read and absorbed your sage advice (50% rule, 2% rule, MFR v. SFR advantages, Landlord 101, et al.) and have started looking for properties in Los Angeles, Inland Empire, and San Bernadino Counties in Southern California-my backyard.

What I am perplexed and frustrated with is the ridiculously inflated asking prices and insultingly low capitalization rates and gross rent multipliers that are out there.

This is what I found on loopnet dot com this morning:

It is a 4-plex in Los Angeles, a couple of blocks from Koreatown in the Wilshire Corridor.

Fourplex - Wilshire Center
155 N. Edgemont St., Los Angeles, CA 90004

Price:$538,500
No. Units:4
Building Size:2,682 SF
Price/Unit:$134,625
Property Type:Multifamily
Property Sub-type:Garden/Low-Rise
Property Use Type:Investment
Commission Split:2%
Cap Rate:4.43%
Gross Rent Multiplier:14.63
Occupancy:100%
No. Stories:2
Year Built:1939
Lot Size:5,401 SF
APN / Parcel ID:5518-012-012
Parking Ratio:4 / 1,000 SF

Who buys crap like this, it will cashflow. . . in 2185 AD!

Sheesh!

And furthermore, this is not Brentwood, Hollyweird, or Beverly Hills. This is a terd property in an run of the mill terd street (very little greenery, the urban jungle) in the heart of Los Angeles.

So, you are prolly gearing up to say, well noob, go to the outskirts of the city for normalized prices.

I have looked in Palmdale and Lancaster (1.5 hours commute outside of L.A. proper, and still in LA County) and the cap rates only rise to 5-7.

My question to my wise investor friends:

When you were starting out, where do you put your time and money? I thought we were still in a recovery and it is a buyers market. Am I being naive?

Where are all those distressed properties? Those disaffected out of state landlords begging to not only give the property away, also finance it for us?

I know the previous was a pie in the sky wish; but seriously, stupid top of the market overinflated pricing on unpopular multi family real estate?

I am wise enough to know putting in offer for 50% of asking price is a lesson in futility, or is it?

Also, I have read from you wise BP'ers, if you buy a property too far away from yourself, you are courting disaster attempting to PM it, better to buy local. . .

So what do you do when LOCAL SUCKS? Where do you take your focus?

Thanks for reading this far, and thanks in advance for your thoughtful advice.

Blessings in your walk, be well all!

Tevis

0Reply
87 views

Most Popular Reply

Steve Babiak
Real Estate Investor · Audubon, PA · Member since 2009 · 13k+ posts · 8k+ votes
13y
Originally posted by Tevis Verrett:
...
I am adding GRM>8 to my war chest of analytics.
...

GRM>8 = "GRM greater than 8" - that is a "don't bother" because rents aren't even 1% of asking

GRM<8 = "GRM less than 8" - that is in 1% rule range; understand that 1% rule is probably break-even cash flow at best. GRM much less is better :)

2Reply
See this reply in the discussion

24 Replies

Jump to latestLatest
  • Steve Babiak
    Real Estate Investor · Audubon, PA · Member since 2009 · 13k+ posts · 8k+ votes
    13y

    GRM of 14 is definitely not a buy for cash flow. You need GRM below 8 just to be at the "1% rule" (where rent is 1% of acquisition). Finding better GRM might mean looking elsewhere, or having to get deals in that area using a different approach.

    1Reply
  • Tevis Verrett
    OP
    Lender · Woodland Hills, CA · Member since 2013 · 364 posts · 115 votes
    13y

    Grateful Steve, you da man! Sir, I follow you already and always look forward to reading your thoughtful wisdom.

    You are one of the very good guys!

    I am adding GRM>8 to my war chest of analytics.

    C'mon y'all, arms are open, bring that wisdom!

    Us newbies are hungry!

    Tevis

    0Reply
  • Steve Babiak
    Real Estate Investor · Audubon, PA · Member since 2009 · 13k+ posts · 8k+ votes
    13y
    Originally posted by Tevis Verrett:
    ...
    I am adding GRM>8 to my war chest of analytics.
    ...

    GRM>8 = "GRM greater than 8" - that is a "don't bother" because rents aren't even 1% of asking

    GRM<8 = "GRM less than 8" - that is in 1% rule range; understand that 1% rule is probably break-even cash flow at best. GRM much less is better :)

    2Reply
  • Tevis Verrett
    OP
    Lender · Woodland Hills, CA · Member since 2013 · 364 posts · 115 votes
    13y

    Smiling Steve Babiak got mixed up with my > and <'s.

    You helped me to realize that I need GRM's less than or equal to 4 for these properties to make any sense.

    Ugh, isn't California supposed to fall off into the Ocean next earthquake anyway?

    Where do you smart money (without giving away any trade secrets) investors find the sweet spot deals?

    They are DEFINITELY NOT with listing brokers!

    (NOTE: I already know about wholesaling tactics: bandit signs, fliers, door knocking, etc. . .)

    That is for the young guns, what do us folks in our 50's do?

    Hug a loved one today, tomorrow is not promised!

    Tevis

    0Reply
  • Steve Babiak
    Real Estate Investor · Audubon, PA · Member since 2009 · 13k+ posts · 8k+ votes
    13y

    You probably won't find GRM on MLS for much less than 8; I highly doubt you'll see a 4 there. Just means you have to offer less than asking to get lower GRM. GRM should be used more as a filter (should I even bother to do a more detailed analysis) IMO.

    0Reply
  • Jeff S.
    Lender · Los Angeles, CA · Member since 2009 · 1k+ posts · 2k+ votes
    13y

    There are no secrets, Tevis. Apartment owners here and in many larger cities are willing to make a lower ROI than in many other areas. If the investment community is willing to pay them, they are not ridiculously inflated prices or insultingly low CAP rates. While you don't like them, they are market price.

    Even at the depths of the recent real estate downturn, apartments never dropped in value. I’ve read study after study about how loans made in the mid-2000’s were or are now coming due, how banks wouldn’t lend, and how there would be a flood of MF foreclosures. The fact is, the loans still perform and banks have done everything they can to not foreclose. This will likely continue.

    The general rule of thumb I’ve found around here is that you have to be willing to accept roughly an 8 to 10% total return. If that excites you, and you have the funds, then you shouldn’t have much problem finding deals. Even then, many of these will be off market and you might not like the area. If you’re looking for short term grand slams, this is probably not an area for you. What are your goals and expectations?

    I don’t know how much business gets done through LoopNet, but like most else in real estate, this is an area where you have to develop personal relationships with those that have deals. When landlords do get in trouble, or are otherwise highly motivated to sell, do you think the properties make it to LoopNet?

    Lastly, you can apply any method to value properties you'd like, but traditionally 4-plexes are residential property and valued by comps, not cash flow. Thus, CAP rates don't apply for valuation in this case. Bad example, but I got your point. Also, to add insult to injury, I think Koreatown is rent controlled.

    Can’t beat the weather though!!

    Jeff

    1Reply
  • Tevis Verrett
    OP
    Lender · Woodland Hills, CA · Member since 2013 · 364 posts · 115 votes
    13y
    Originally posted by Jeff S:
    . . . I don’t know how much business gets done through LoopNet, but like most else in real estate, this is an area where you have to develop personal relationships with those that have deals. When landlords do get in trouble, or are otherwise highly motivated to sell, do you think the properties make it to LoopNet?

    Can’t beat the weather though!!

    I second that my friend!

    Bless you Jeff. I appreciate your wise and thoughtful words.

    I read up on cap rates and it is a parameter of risk factor.

    For instance, if we go all the way out to Victorville (for non Californians-you take a left and you are in the middle of BF Nowhere), cap rates jump to 10%, while here in our backyard it is 6-8. I am new to this and shoot man there is so much to learn. As you wisely surmised, no drowning property owner wont put up their property on loopnet. . . smiling at my naivety.

    Again, a grateful thanks. Now kinda owe you and Steve Babiak one. Since we are neighbors, tell me if I can support you in any way!

    Tevis

    0Reply
  • Josh Prince
    Investor · Los Angeles, CA · Member since 2010 · 116 posts · 36 votes
    13y

    Hi Tevis,

    I am in LA too. Listing prices have jumped over the last year for both residential and commercial mainly due to the media attention to real estate investors - individual and institutional - as well as the continued low interest rates.

    Even in places like South LA or Compton - 10x GRM listings are standard. And for areas like Koreatown and Echo Park, which are known as "good real estate investment markets" - forget it - the listings are sky high. Might as well add Highland Park, Mid City, East Hollywood and any other marginally urban but up and coming area to that list. Some deals are even getting done at these high prices, mainly because people see the low interest rates and think they will be able to cash flow at current prices.

    Between that and rent control hassles in LA (on every pre-1978 building), I am sitting on the sidelines for a while to see if anything gets worse.

    As others have said, there are of course deals happening due to specific circumstances, but those don't make it to the MLS or Loopnet - if you buy something there, you can be sure that the only reason you got the deal was that you were willing to pay more than everyone else who saw the listing.

    Good luck and I will look forward to hearing about what you do!

    0Reply
  • Tevis Verrett
    OP
    Lender · Woodland Hills, CA · Member since 2013 · 364 posts · 115 votes
    13y

    Thanks all for your sage words. Josh Prince I too am going to sit on the sidelines. . . or perhaps start learning how to buy in other states.

    This ridiculous So Cal markets cannot last forever.

    Thanks all for helping me to become "smart money."

    Tevis

    0Reply
  • James W.
    Real Estate Investor · Member since 2008 · 56 posts · 0 votes
    13y

    stupid question but what is Gross Rent Mulitplier and how do you calculate it? I am not as familiar with MF. Can someone explain this? Thanks!

    0Reply
  • Tevis Verrett
    OP
    Lender · Woodland Hills, CA · Member since 2013 · 364 posts · 115 votes
    13y

    Not a stoopid question at all Brother James W.

    Pleased to share:

    http://www.biggerpockets.com/blogs/693/blog_posts/4419-gross-rent-multiplier-the-rubber-chicken-of-commercial-property-analysis

    We are stronger, together!

    Tevis

    0Reply
  • Account Closed
    Investor · Los Angeles, CA · Member since 2013 · 65 posts · 11 votes
    12y

    @Tevis Verrett I'm also looking for a MFR (2-4 units) under 700k in the LA area. I don't have access to the MLS, so I only use Zillow and Redfin for my numbers. For the past two months, I've crunched about 100+ properties.

    Almost all the numbers I got did not even follow the 2% rule (Most of the numbers I got were around 0.4% monthly income from the purchase price). The rule of thumb from UBG (50 percent rule, $100 net income per unit, etc) don't even apply to any of the properties I've seen.

    I'm thinking I should get my license so I can get access to MLS. Do you think that will improve my chances of finding properties that have better cashflow than properties in Redfin/Zillow?

    1Reply
  • Trent Begay
    Phoenix, AZ · Member since 2013 · 37 posts · 2 votes
    12y

    What I would do is throw out an offer. Would not go below a 10% cap rate especially starting out. Although I live in Phoenix and the market may be a little more geared to make that work. However the primary rule about any market is: things are only worth what people will pay for them [regardless of what they want].

    0Reply
  • Mehran K.
    Investor · Wichita Falls, TX · Member since 2010 · 3k+ posts · 603 votes
    12y

    @Account Closed I think you'll be hard pressed to find a M/F property around here that meets the 2% rule. In California, there's more people with money to throw at real estate, which means more competition. More people are willing to accept lower rates of return on their money, and that drives the prices up.

    You may be able to find a deal with creative financing that will cash flow, but you have to be pretty savvy to make something like that happen. This reason is why I live in LA and invest out of state.

    Although getting your license is a great thing, I don't think it will make M/F's that meet the 2% rule show up :(

    2Reply
  • Account Closed
    Investor · Los Angeles, CA · Member since 2013 · 65 posts · 11 votes
    12y

    @Mehran K. good input, thanks. How is it going for you investing out of state? And how do you know which cities/states should I be looking at? Do you have general tips for newbie like me?

    0Reply
  • Mehran K.
    Investor · Wichita Falls, TX · Member since 2010 · 3k+ posts · 603 votes
    12y

    @Account Closed Going well so far, I'm happy. I talk about my experience starting up on the BP Podcast: Show 25 - My segment comes on around 48 minutes. I go over those questions, let me know what you think!

    1Reply
  • Paul Timmins
    Specialist · Rockland, MA · Member since 2010 · 7k+ posts · 2k+ votes
    12y

    @Tevis Verrett

    Welcome.

    Locate and attend 3 different local REIA club meetings great place to meet people gather resources and info. You will meet wholesalers who will present properties at investor pricing.

    Locate a couple landlord meetings. Here you may find or hear of motivated sellers.

    In CA Specialized or Niche Housing works well to get higher returns. Student Housing is an example which can return 2-4 times more rent. I spoke with someone yesterday who gets an old Victorian with a bunch of beds and rents them out to tourists several hundred per night per bed.

    In commercial 5+ units we try to get Cash on cash 12%+, Debt coverage ratio 1.6%+ and Cap of 8%+

    Good Luck

    Paul

    0Reply
  • Account Closed
    Investor · Los Angeles, CA · Member since 2013 · 65 posts · 11 votes
    12y

    @Mehran K. I did get a chance to listen to Episode 25. You definitely have an inspiring story! It definitely helps to know that there's someone from LA in this BP community who has done very well to do out-of-state investing. Your story inspires me. Still scared, but I'll probably spend another few weeks on BP browsing to do more homework. PS - your landlord vetting idea was great. I'll probably need those questionnaire at some point.

    0Reply
  • Mehran K.
    Investor · Wichita Falls, TX · Member since 2010 · 3k+ posts · 603 votes
    12y

    @Account Closed! It was definitely worth all the butterflies I felt before the podcast to here comments like yours, awesome :) I still have a long way to go, but I feel I have my bearings and will continue to learn/pick up properties moving forward.

    Here's two questionnaires:

    One I put together

    One Josh put together

    If you have any questions, just send me a pm.

    0Reply
  • Christopher Telles
    Investor · Irvine, CA · Member since 2015 · 373 posts · 205 votes
    11y
    Originally posted by @Tevis Verrett:

    Thanks all for your sage words. Josh Prince I too am going to sit on the sidelines. . . or perhaps start learning how to buy in other states.

    This ridiculous So Cal markets cannot last forever.

    Thanks all for helping me to become "smart money."

    Tevis

     Many, many people have made substantial profits buying real estate in the Los Angeles markets since the original date of this post. And 2 1/2 years later the market continues its march towards...

    It is not uncommon today to see MF listings hitting the market sub 3% CAP rates. Uniformly, almost all prime investment area MF property is listed at sub 4%CAPs. The rules for today are to find off market distressed assets or distressed situations e.g. divorce, bankruptcy, probate, partnership disputes, and compete for those assets.

    Alternatively, another avenue for higher yields is to look at other asset types such as office, industrial, mixed use, retail, or special purpose properties. Or, look at other real estate business models such as FixNFlip.

    Whatever your approach, you will need to look at a tremendous amount of deals, kick more than your fare share of tires, and make lots and lots of offers that make sense for YOU. The sellers initial response or rejection isn't within your control nor should it be of your concern. Find a deal that you like, and make an offer that works for YOU. Rinse and repeat until your in a deal that you know will pay you money.

    0Reply
  • Rick H.
    Lender · Greater LA/Orange County area, CA · Member since 2012 · 3k+ posts · 3k+ votes
    11y

    The word "probate" lead me to this thread, yet again.

    I've had many MF doors over the years. If I had planned better, I might had given more attention to my rental acquisition efforts a few years ago.

    That being said, I've obtained much higher yields on my SFR and duplex investments.

    The real opportunity is that a tremendous number if property owners are retiring and turning a new chapter in the lives and want to avoid the things that come with property ownership and management. 

    That's why I still believe the best way to buy probate deals is with seller financing, anticipating that your seller-come-note-holder will wants to negotiate later when they need cash and come back to the well for more. This is known as discounting the debt to the dead.

    0Reply
  • Chuy Gonzalez
    Investor · Long Beach, CA · Member since 2012 · 313 posts · 190 votes
    9y

    Today July 31, 2017 I was doing research for fun...and this topic came up. This property at 155 N. Edgemont St., Los Angeles, CA 90004...is now selling for $1,075,000...with $44,897 of yearly gross rents...yikes.

    0Reply
  • Catherine Coy
    Huntington Beach, CA · Member since 2012 · 73 posts · 57 votes
    8y

    The listing at 155 N. Edgemont Street expired unsold in September 2017.

    0Reply
  • Frederick William
    Member since 2022 · 49 posts · 17 votes
    3y
    Quote from @Catherine Coy:

    The listing at 155 N. Edgemont Street expired unsold in September 2017.


     It will sell for atleast 1 million today. 

    0Reply
Join the conversationCreate a free account to reply, vote on answers and follow this thread.
Log InJoin for Free