Las Vegas 4 plex - 25% CAP rate - what's the catch?

Breckenridge, CO · Member since 2011 · 13 posts · 0 votes

Hi -

New here, so please be gentle with me..! I'm looking at a few 4 plexes in Las Vegas, rehabbed and rented, with CAP rates in the range 23-25%. Even after allowing the recommended 50% for expenses, etc., they still look like a remarkably attractive investment.

Which brings me to my question - what's the catch?!

Thanks --

Dave

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Will BarnardPro Member

Moderator

Developer · Santa Clarita, CA · Member since 2008 · 15k+ posts · 10k+ votes

15y

Max,

Averages are just that, averages and mean nothing for one specific investment. That said, if you end up with 50 doors over a long period of time, you can expect the average to be very close to this number when said and done.

Locations and rent values play a role in the fluctuation of the "average" total costs.

What I do is get the current vacancy rate and compare it to the last 24 month vacancy rate. If the current is higher, I use teh last 24 month average as my plug in for vacancy. If the current is lower, I use that number. After subtracting the vacancy (also rent loss), I come to the AGI (adjusted gross income). From there I subtract out "operating expenses" and "capital reserves" to arrive at my NOI (net operating income).

One could say that the 50% rule does this all for you, but I like to have a more accurate number for a specific property.

Again, keep in mind that locations and rent values affect OE %'s. I have found that my properties with rent values above $1000 have a bit lower in operating expenses as I have expereinced less tenant damage, lower turn-over ratios, and lower other costs.

Location also changes things. Places like Detroit and similar have statewide higher vacany rates than other places and as such, you coulod have higher than 50% Total expenses in some places. If you always invest in these types of locals, you could always have hiogher expenses.

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Andy More
Residential Lender · Columbia, MO · Member since 2010 · 90 posts · 26 votes
15y
What are the rents and what are the selling for?
0 Reply
David Knell
OP
Breckenridge, CO · Member since 2011 · 13 posts · 0 votes
15y
Typically $600/unit; asking prices a little north of $100K.
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Joel OwensBusiness Member
Moderator
Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes
15y
2,400 gross rent X 12 = 28,800

28,800 divided by 2 = 14,400 NOI before Debt

10CAP would be a purchase of 144,000

14 CAP would be at 105,000

The numbers of a 20 plus CAP aren't adding up.

What are they basing the 600 a month rent on?? Are the units rented out 100% at 600 or are they running vacancies and giving you a pro-forma number??

If rents are at 600 have they been that way for a year?? Are rents declining in the area and rents are coming up fro renewal??

Did the seller give a bunch of free rent or other concessions just to fill the place up at inflated rents thereby puffing the numbers??

Example a 600 a month rent for a year with 1 month free is really 550 a month after concessions.

Details,details,details.The devil is always in the details my friend.
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Account Closed
Residential Real Estate Broker · Oklahoma City, OK · Member since 2011 · 114 posts · 38 votes
15y
Does the owner pay any utilities? That would drive the expenses way up.
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George P.
Real Estate Investor · Baltimore, MD · Member since 2008 · 1k+ posts · 268 votes
15y
Joel, you forgot to take into account vacancy rate (10%?)
David - is $600 is what they currently pay, or is it what it could be rented for? Are all 4 units rented? Did you find out what other expenses the owner pays (utilities, water, how much is property tax and insurance).

Do you want to pay cash or obtain financing? What kind of financing?

You need to post more details that cap rate if you want opinions, IMO

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Mark B
Investor · Albuquerque, NM · Member since 2009 · 118 posts · 43 votes
15y
Originally posted by George P.:
Joel, you forgot to take into account vacancy rate (10%?)

I might be wrong but I think the 50% rule normally accounts for a 10% vacancy.

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Brendan J.
Homeowner · Knoxville, TN · Member since 2011 · 207 posts · 73 votes
15y
George,

Joel used a 50% rule to calculate Operating Expenses. This would include everything except debt (vacancy rate, tax, insurance, capital repairs, etc).

Just saw that Mark posted too. +1
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George P.
Real Estate Investor · Baltimore, MD · Member since 2008 · 1k+ posts · 268 votes
15y
I don't think operating expense should account for vacancy rate.

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Sharad M.Pro Member
Carlsbad, CA · Member since 2010 · 1k+ posts · 1k+ votes
15y
Originally posted by George P.:
I don't think operating expense should account for vacancy rate.

Why not?
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Will BarnardPro Member
Moderator
Developer · Santa Clarita, CA · Member since 2008 · 15k+ posts · 10k+ votes
15y
Originally posted by George P.:
I don't think operating expense should account for vacancy rate.
I agree George! However, the 50% rule used by many here on BPis a quick calculation estimate to derive at a "total costs" approach, not just operating expenses. Many just summarize by stating "operating expenses" average 50%, what they really should state is that "total expenses" average 50% for this rule of thumb. Total meaning operating, capital, and vacancy/rent loss.
I use a different formula, however, the 50% rule is a great quick calculation tool.

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Sharad M.Pro Member
Carlsbad, CA · Member since 2010 · 1k+ posts · 1k+ votes
15y
Will,

What formula do you use? And what does your average come out to for "total expenses"?
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Will BarnardPro Member
Moderator
Developer · Santa Clarita, CA · Member since 2008 · 15k+ posts · 10k+ votes
15y
Max,

Averages are just that, averages and mean nothing for one specific investment. That said, if you end up with 50 doors over a long period of time, you can expect the average to be very close to this number when said and done.

Locations and rent values play a role in the fluctuation of the "average" total costs.

What I do is get the current vacancy rate and compare it to the last 24 month vacancy rate. If the current is higher, I use teh last 24 month average as my plug in for vacancy. If the current is lower, I use that number. After subtracting the vacancy (also rent loss), I come to the AGI (adjusted gross income). From there I subtract out "operating expenses" and "capital reserves" to arrive at my NOI (net operating income).

One could say that the 50% rule does this all for you, but I like to have a more accurate number for a specific property.

Again, keep in mind that locations and rent values affect OE %'s. I have found that my properties with rent values above $1000 have a bit lower in operating expenses as I have expereinced less tenant damage, lower turn-over ratios, and lower other costs.

Location also changes things. Places like Detroit and similar have statewide higher vacany rates than other places and as such, you coulod have higher than 50% Total expenses in some places. If you always invest in these types of locals, you could always have hiogher expenses.
Podcast Guest on Show #130
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Sharad M.Pro Member
Carlsbad, CA · Member since 2010 · 1k+ posts · 1k+ votes
15y
Will, great points and I agree with you that location does play a big factor in your total expenses.
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Will BarnardPro Member
Moderator
Developer · Santa Clarita, CA · Member since 2008 · 15k+ posts · 10k+ votes
15y
Originally posted by Max I:
Will, great points and I agree with you that location does play a big factor in your total expenses.
Thanks Max and thanks for your votes for my posts as well!
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Mike McKinzie
Investor · Westminster, CO · Member since 2009 · 1k+ posts · 1k+ votes
15y
Due Diligence! I would ask to see the last 2-3 years of Schedule E's that were filed for the property. I would talk with the tenants. I would talk with the neighbors. Anyone can say anything. There is a lot of work to do when researching a property, but there is a lot of profit as well.

Personally, I would avoid Vegas right now. I think houses will drop at least another 20% and then you will see tenants buying houses right and left. And with so much inventory, it will be difficult to keep rentals rented.
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Joel OwensBusiness Member
Moderator
Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes
15y
George,

I specialize in listing and selling apartments for my clients.What I posted was a down and dirty 10 second calculation.

Typically costs average to

10% property management
15% vacancy/loss turnover
35% operating and expenses

= 50%

This doesn't include deferred CAPEX that the seller has put off to make their costs seem lower and profit seem higher.

Buying acquisitions is a process through which you put a filter.When I was working with developers they would plot out about 10 locations on a map.I would pull the preliminary information and we would go visit the sites.

From that step half of the properties would be crossed off for one reason or another.Eventually after multiple steps we would negotiate with 2 to 3 sites max.The developer would go with 1 site and maybe 2 if they could get both at great deals.

The higher the dollar value on a deal the more scrutiny goes into it.

Buying a quad versus a 200 unit apartment building has a totally different level of risk versus reward ratio.

When buying a building you have to know in the immediate area how much vintage product you are competing against,versus relatively new product,versus new product slated for development where the plans and land is already bought and the developer is waiting to build to time the market.

All of these factors among many others will affect the property you are contemplating purchasing.

It doesn't make sense on the front end to do a 100 point checklist of due diligence when the seller might not even sell at a range where it would make sense.

Do the down and dirty 10 second calculation and determine the sellers motivation and go from there.

I know people who would spend hours trying to analyze a property only to find out from a quick phone call that the seller was unrealistic.

Instead of wasting that time they could have found a motivated seller to conduct due diligence on with a deal that might happen.That's not to say the unmotivated seller will not be motivated at some point but you can't wait on that with your other plans.

When they come back to you if all your capital isn't ties up you can look at it again.
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Stan Jackson
Real Estate Broker · Fort Pierce, FL · Member since 2009 · 221 posts · 95 votes
15y
I did not want to start a new thread to ask this question, so I thought I would ask here, hopefully that's okay.

Will (and others),

When looking at the vacant rate, I understand you are speaking of the subject property; do you at any time consider the vacant rate of the subjects' competitive area? Meaning, to take a look at the total rental units and the occupancy percentage.

Should I take into account that the subject property may have a low vacancy rate, but similar and closely located properties have a high vacancy rate?

I'm thinking by comparing the area and the 12-24 month look back of the subject could influence my vacancy percentage, sway the actual number in one direction or another.

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Will BarnardPro Member
Moderator
Developer · Santa Clarita, CA · Member since 2008 · 15k+ posts · 10k+ votes
15y
Stan, I consider Both the subject proprty and area current average for vacancy rates. I use the number that would best get me the lowest acquisition price.
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David Knell
OP
Breckenridge, CO · Member since 2011 · 13 posts · 0 votes
15y
Hi all -

Thank you all very much indeed for your input, which has been very useful. I'll update with how I get on in due course..!

--Dave
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