All Forum Posts by: Chase McArthur

@Shawn Hershberger

I second @Steve Hall. There's way too much information that is missing to be able to accurately determine whether this is a good deal or not. Just a quick look at your numbers, if only 4 units are currently occupied that puts GRI @ $34,560. Assuming expenses are 50% that puts NOI @ $17,280. An 8.9 cap would put the value @ $194,157. By those calculations you're about to offer ~$176,000 more than the property is worth as it sits.

Should you decide to gamble on your crystal ball and you manage to achieve 100% occupancy with an average rent of $735 a unit, that puts your GRI @ $52,920. Again, assuming 50% expense ratio that puts NOI @ $26,460. An 8.9 cap would then put the value at $297,303. By those calculations you're still offering ~$73,000 more than the property is worth.

Using the first calculation, if you purchase @ $370,000 you just bought a 5 cap property. Assuming your terms are good, 25% down another $3000 in improvements your in ~$96,000. Bump rents to $775 puts GRI @ $55,800, NOI $27,900, DS ~$16,500, Net $11,400, that puts CoC at 12% and that's in a perfect world. Miscalculate anything and that 12% evaporates.

I would love to see more info, but as it sits offer less money or walk away.

@Matthew Shay

@Syed H.

I'm not sure I understand your logic. Multifamily assets that are 4 units and below are rarely valued using an income approach, as these are not considered commercial properties. Commercial properties, by lending standards, are 5+ unit multifamily assets. Any broker or individual investor who values a non-commercial asset using commercial metrics are only showing their ineptitude. 

It actually does matter that cap rates are as low as they are in certain markets, as it is those cap rates that determine the overall value of a property. The value of the property has a direct effect on the amount of leverage that can be geared for that property to ensure a particular rate of return for investors. 

Also, rent growth is driven by pressure from the migration of renters into a particular market for various reasons, the most likely being job growth. Job growth is a sign of a solidification of market dynamics as well as an increase in per capita income. An increase in income means the potential for rent bumps. This migration coupled with income growth increases demand for both renters and investors resulting in cap rate compression. Therefore, cap rate compression is direct result of rent growth. 

By institutional investments I assume you mean properties and portfolios valued at $20M+. Actually, those deals are sold at values that are " determined by the market". These deals are often the ones that set the markets as far as cap rates. When an institutional deal is being evaluated it is the aforementioned economic conditions that are analyzed in order to determine the price that the buyer is willing to pay based off of their investment criteria. IRR is a lose metric that can vary drastically depending on the capital structure and terms which is why the IRR values are determined within a range. IRR also depends on a multitude of other financial analytics for accuracy. Seasoned smaller investors typically base their initial investment decision on the CoC returns as this metric illustrates a more accurate snap shot calculation.

@Immanuel Sibero

A low cap rate doesn't equate to an asset being overpriced. Lower cap rates equate to lower returns. The only way someone can "over pay" for an investment property is if they botch their own analysis. This is a very common occurrence with newbie investors. Often times they will over estimate the potential while under estimating expenses, neither of which have anything to do with the cap rate.

@Matthew Shay

The reality of the matter is at the end of the day the driving factor for cap rates are market comps, just like residential real estate. Cap rates for the markets are set by previously sold assets within the market. Therefore the market actually sets cap rates. The true value of any investment property is set by those that are willing to pay for it.

As a broker, establishing valuation to take a property to market involves understanding the fundamental metrics that are involved. Sure interest rates and economic growth as well as property conditions factor into the equation, but only so far as to establish a price that can be defended. By "defended" I mean justifiable. The truth of the matter is a symbitotic relationship between brokers and buyers are what truly establishes market cap rates. For example, when a property valuation is being determined in order to take it to market there is only one thing that ultimately determines the cap rate; at what cap rate did the last comparable property sell at? If a comp went to market at a 6.5 cap and it only sat on the market for 28 days then I can more than likely market my property at a 6 or 6 1/4. Now, had they marketed it at a 6.5 and it sat on the market for 60 or 90 days or longer and then sold at a 6 3/4 or 7 cap then I now the likelyhood of me getting a 6 1/4 is slim. If the market is showing strong fundamentals then I can more easily justify valueing my property at a lower cap, especially if the velocity of the market is strong. Consequently, if I snag a buyer at 6 1/4 then this sets the stage for the next property to go to market at or below the last sale. This is called "setting the market" in my business.

Commercial real estate is at the very least an intrastate transaction. Buyers are nationwide, sometimes international, therefore assets are not priced for the local guys, especially for mid-market assets and above. If I'm listing a $6M property in a solid secondary market I'm not trying to sell it to the local investor who is only willing to pay $5.5 for it. Im pricing it to sell to the investor coming from an overpriced primary market with compressed cap rates. The reason is because my 6 cap property is selling in his neighborhood for a 4 cap. He's getting a deal.

Sure, me and @Immanuel Sibero and @Greg Dickerson can talk all day about market fundamentals and their affect on emerging trends and cap rate viability, but at the end of the day its about what an investor is willing to pay.

@Matthew Shay

BTW I love these technical questions...keep them coming!

@Matthew Shay

No forecasts include DS as far as I know, because its an unknown variable.

@Matthew Shay

That's an awesome question! It's also a bit tricky to answer. Historical cap rates determined by a regression analysis can be a useful tool for understanding the overall trend of an area. But, historical cap rates don't necessarily illustrate the performance of the assets in a given area. There is a common misconception about what cap rates are and what their relevance is to a given asset. Most people would lead you to believe that the cap rate of a property gives a snapshot determination of the performance of a particular investment. When in actuality cap rates are more of a benchmark for determining the demand for a particular asset in a particular market. Although directly affected by the performance of an asset, the cap rate is really a driver for understanding the affects that outside capital is having on a particular market. Essentially it is a direct correlation between supply and demand. So while it is essential to understand historical cap rate trends, it isn't necessarily a good benchmark to determine the true value of a property. In other words, the volatility of a given market has more of an affect on cap rates than the actual performance of the asset itself. 

Long story short, knowing the historical rates are beneficial but it doesn't necessarily predict the future rates of the market.

@Bryan Carleton

Check into census data

@Milla McCammon

You are more than welcome. If you need me to help you with valuation, let me know.

@Dan Shelhamer

Look into DST's (Delaware Statutory Trust)

@Milla McCammon

Hi Milla, yes they are considered multifamily properties. They are valued just like an apartment building. They also typically have higher cap rates than apartments because they have less expenses, long term tenants and an overall "safer" investment. They are also technically low-income housing in the realm of things.