All Forum Posts by: Account Closed

Edward, I think you are getting more than a tad.  You see the flaws in all the incorrect information that is bandied about here on BP.  If you have any specific questions on my information I will be happy to walk you through the information.  Better that you start your investing career with correct information.

1. So you are saying someone will pay MORE for a NOI to get LESS "return"?

2.  AND exactly how do you compare properties when you don't have sales prices?

The Coconut Wireless has rumours of someone scouting Honolulu locations for Winter 2018 by the name of Kei Malakina.  Boy does that name sound familiar.  But this could all be wishful thinking.  But I'm not taking chances and counting on 18 months to get into Speedo shape.

http://www.e-hawaii.com/hawaiian-names/your-name-i...

BUT that is not the definition of a cap rate.  I am not arguing against using multiple years of data.  It is just that is NOT the purpose of a cap rate and is one of it's faults.

Heck, I use decades of data when appropriate but a cap rate is designed to use only one years financials.

Please illustrate how you would correctly use multiple years of income and expenses to calculate NOI. You will not be able to.

1.   5% is a lower cap rate than 10%

2. $10,000 NOI bought at 5% = $200,000

3. $10,000 NOI bought at 10% =$100,000

IF the property performs as on paper then it will take 20 years of NOI to pay off the $200,000 purchase.

IF the property performs as on paper then it will take 10 years if NOI to pay off the $100,000 purchase.

4.  20 > 10

5.  10% > 5%

6.  Therefore the lower cap rate WILL NOT pay back FASTER.

Although the market is saying they think the 5% cap rate market will be more profitable.

By definition a cap rate only looks at one years financials.  Can you illustrate how you would use more than one years financials?   

3. An investor using "advertised" cap rates as a screening tool is an idiot. The market sets the cap rate. An investor uses market cap rates to reach market values. No one "buys" a cap rate. When you make an offer based on the market cap THEN you screen out idiot sellers that don't want to sell their properties.

Your method of screening by "asking price" would only take LESS time if all properties SOLD for asking price.  Otherwise you have to keep computing it each time your offer price or the counter offer price changes.  Way easier and less time consuming to ignore asking price and just make offers on market value.  A seller that wants to sell will not ignore a market price offer. 

Exactly. Let's say rents are half what they should be and assume (probably incorrectly) that NOI will double also.

In either instance the property is capable of generating $10,000 NOI. If the market is buying similar properties with potential $10,000 NOI at 10% cap rate then the property is worth $100,000. But the property is only generating $5,000 NOI. But it will only take one month to get the rents increased and you'd lose less than $2,000 in rents and have mailing costs of maybe $100 to notify of rent increases so maybe $2,000 hard costs but you are also taking a risk that the market will change so you want a risk discount. That you will have to negotiate so maybe you can talk the seller into a $10,000 discount off the Market value of $100,000 and buy at $90,000. The market will look at your sale and think hey tht property sold at a 11.1% cap rate BUT people in the know will say correctly that you bought at a 10% cap rate with a $10,000 below the line adjustment because of the under performing rents.

Aaaaaarg!  

1.  It is not a time metric.

2.  It only looks at one years financials.

3.  Check your math.

Oren,

1.  Under market rents DO NOT change the cap rate.

2.  If you see a listing at a 12% cap rate in a 6-7% cap rate market you can be 99% sure that the cap rate was NOT calculated correctly.

3.   An investor using "advertised" cap rates as a screening tool is an idiot.  The market sets the cap rate.  An investor uses market cap rates to reach market values.  No one "buys" a cap rate.  When you make an offer based on the market cap THEN you screen out idiot sellers that don't want to sell their properties.