Capitalization rates - where can I find these rates for an area

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Capitalization rates - where can I find these rates for an area

Scott Walters
Member since 2019 · 7 posts · 2 votes

As I try to figure out what to pay for a property where can I find what capitalization rates are for specific areas?

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  • Account Closed
    Investor · Gardena, CA · Member since 2017 · 445 posts · 398 votes
    7y

    I never heard of CAP RATES being about the same for specific areas . Two totally identical building next door to each other can have totally different CAP RATES. The Cap Rates will be different because of the price paid for the property, different rental income, different operating costs and the way each building is managed differently.

    The Gross Multiplier is more specific for different areas and for my analyzing the Gross Multiplier is much more important than the Cap Rate. The Gross Multiplier for buildings in a not-so-desirable area will be between 6 to 10. For a buildings in nicer areas the Gross Multiplier may be 11 to 18.

    I never look at the Cap Rate when purchasing properties because there are too many factors that are much more important i.e. how much can I improve the property and the rental income. How much can I increase the rent the day I purchase the property. How much can I raise the rent every year. The Cap Rate only tells me what the property is currently doing. I have to stretch my numbers out 1, 5, 10, 20, 25 and 30 years to see what I can do with the property.

    The funny thing about the Cap Rate is I went to real estate club meetings two times when the speakers who were super experienced with real estate could not explain what the cap rate means nor did they know how to do the math. I think this shows that the Cap Rate is not really that important even to some of the experienced investors.

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  • Scott Walters
    OP
    Member since 2019 · 7 posts · 2 votes
    7y

    @Jack Orthman thanks Jack for the insight. GRM is another number I'm looking at and will consider more importantly.

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  • Account Closed
    Investor · Gardena, CA · Member since 2017 · 445 posts · 398 votes
    7y

    This is how to use the Gross Multiplier for analyzing properties. This is a 5-unit property currently for sale in Arizona. You can find it at 2102 Morten on loopnet.com and there are thousands of properties like this in several states. Memphis has apartments for $36,000 per unit and the rents are close to $1,000 per month.

    The asking price is $345,000. I would offer $280,000 for many reasons. About 2 years ago these buildings were selling for about $180.000. Today it is $345,000, but it is for sale on loopnet.com. That usually means, they are having a hard time selling it and they are a little more-desperate.

    Suppose you pick up the building for $300,000 and you put $90,000 down. This is how the numbers look.

    Positive cash flow us a little more than $583 per month per unit. That gives you a nice juicy cash flow of $2915 per month and $35,000 per year.

    Show me a house that does that for a $90,000 down payment.

    The day you close escrow raise the rents $100 in each units. Even if the rents are already fairly high you can usually get $100 more because you tell the tenants you are going to constantly improve the property. You are going to clean up the laundry room, make the common areas nicer, clean and paint apartments, install new flooring, etc.. You ask the tenants if they would like these improvements and be willing to pay an extra $100. Then, you start with improvements on the outside that all the tenants can see and you do them slowly and a little at a time.

    The day you close escrow you meet with all the tenants and raise all the rents $100. The day day you close escrow you just made $60,000 because you multiply the Gross Multiplier time the increase in rents $100 x 5 = $500 per month x 12 months = $6,000 x Gross Multiplier 10 = $60,000.

    One important thing to remember! I did not bother to look at the Gross Multiplier for this building. I only took a wild guess and 10 in today's market is very low. If this building has a Gross Multiplier of 15 you would make your entire $90,000 deposit back the day you close escrow.

    Profit by end of first year you earned:

    You just increased the re-sale value of the building by $60,000
    You collect the original cash flow
    You collect the $100 increase in rents for the first year.

    Your total profit is $100,980. You got back your $90,000 plus $10,980.

    Now, you stretch out your ROI further to see what it looks like when you raise the rents by 5% every year.

    You can see the amazing results on the chart. By the end of the 3rd year you got your $90,000 deposit back almost 3 times. You cannot do this with single-family properties.

    Looking at the Cap Rate for a first glance at a property is okay. If I see two buildings that are identical in every way and one has a higher Cap Rate I will look at the higher Cap Rate first. But, when looking at properties all day long I pay no attention to the Cap Rate because you need to analyze multi-units base more on what you can do with the property and not so much about what it is currently doing.

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