13.46% CAP RATE in CA? Why is this still on the market for 174+ days?

[Adam Ng]

OK. I'm new here, and I'm ready to drop some money. I can't for the life of me figure out why this property with a 13.46% CAP RATE (which is impressive for California) has been on the market for 174+ days but from my POV it brings in some $$$$.

I noticed it says "Please do not disturb tenants, they do not know it is for sale" - so I imagine the property hasn't been inspected.

Why's this on the market still? Any ideas?

https://www.redfin.com/CA/Palm-Springs/3775-El-Dor...

My analysis has come to:

CAP RATE: 13.46%

Purchase Price: $270,000

Down Payment: $67,500 (25%)

Monthly Mortgage: $1247.63

Monthly Gross Rent Income: $3000.00

Monthly Net Income (excludes mortgage): $2916.67

Cash Flow after mortgage: $1669.04/month

Cash on Cash Return: 29.67%

Numbers look great, so what's the catch?

[Jon Holdman]

First, the 13.46% cap rate is totally, completely, utterly bogus.  Its a lie.  Its a fourplex that rents for $750/unit/month.  That's $36,000 per year in gross scheduled rents.  They're asking $270,000.  A cap rate of 13.46% implies net operating income of $36,342.  On rent of $36,000?  Not only does that imply there are no expenses at all, but an extra $342 a year falls out of the sky.  So, that cap rate number is complete fiction.

Cap rates provided by sellers and their agents are almost always fiction.  Ignore them.

A more realistic estimate of cap rate is to apply the 50% rule to estimate NOI at $18,000 a year. Divided by the $270K asking price gives a 6.7% cap rate.

If it has been in and out of escrow there is some non-obvious issue.  Asking for a contract prior to inspections isn't too unusual.  But the fact it keeps falling out indicates there is probably some issue that crops up when the buyers start looking.  So, this is an even worse deal that it initially appears.