All Forum Posts by: Immanuel Sibero

@Nicholas Schwarz

I agree with @Kenneth Garrett. Mortgage and loan related payments are NOT operating items, because they are not needed to successfully operate a property. So the "O" in NOI is short for "Operating", therefore NOI is not affected by mortgage/loan related payments or any other non-operating expenses. This also means NOI stays the same regardless of how much you put down.

Also, the cap rate of a building costing $3,650,000 with an NOI of $267,117 is 7.3% not 5%.

Cheers... Immanuel

@John Thedford :-)

@Robert Shoffner In the absence of truth, things do get complicated, don't they?

Reminds me of that saying:

If you fail to plan then you plan to fail.

Cheers... Immanuel

@Tom Burke

@Corby Goade

I second Corby on the numbers and third him on Cap Rate. It is widely misused and perpetuated on BP when it comes to residential properties (even by experienced professionals as Corby pointed out). On most BP posts, many erroneously use cap rate as a performance measure which cap rate is not. On these posts, if you were to substitute "yield" or "operating yield" instead of "cap rate", all of a sudden things would start making more sense. But the more experienced investors keep throwing cap rate around as performance measure so newbies can't help but think it sounds savvy.

Cheers.

Agree with everything you said above!!

I incorrectly interpreted that you had just discovered "market" cap rate in general... Now I realize that you understand cap rate and simply had an aha moment on a small aspect of market cap rate (should've known this from your post count...lol). I see it as a coin with two opposing sides - a low cap rate is bad because of high acquisition price but good because improvements are valued high, a high cap rate is the exact opposite.

However, I have also seen fully updated properties with virtually no value add/improvement opportunities going for insanely low cap rate here in some DFW areas. The basis for these sales is simply bullish expectations on the local economy - insane rent increase. Basically some investors think they can buy at insanely low cap rate, but with insane rent increases they will still make insane amount of money without doing anything... lol.

My comment about property CAP rate not relfecting how the property is managed is more directed to the other poster. As you pointed out, cap rate discussion tends to degrade into its most elemental level. It's a reflection of how misunderstood cap rate is. Feels like it is the only area in which I'm interested enough to make a post. I'm a newbie and learning :-)

Cheers... Immanuel

@Dustin Beam

At 7% market cap rate, buying at 4.5% CAP and "increasing" your cap rate to 7% is not going to increase the value of the property. If at the time of sale, the market cap rate compresses to 4.5% then yes he will make money, but what if market cap rate expands to 9% (i.e. which are long term norms)?

The question is where is the Chicago market cap rate going? Is it more likely going to 4.5%? or 9%? Which is more likely - the economy slowing down, interest rate going up (i.e. cap rate expansion) or -the economy going even hotter and interest rate going down (i.e. cap rate compression)?

Your aha moment is as you described - "market" cap rate. It's a metric that's frequently confused with "cap rate" as it is discussed here on BP. The cap rate that's talked about often here on BP is "property" cap rate (i.e. the one you get by dividing NOI / Cost(Value). The "market" cap rate you are talking about is, as the name suggests, "market" driven or "market" specific. So I agree with you that this cap rate is a market force. It's a barometer of how desirable specific class of properties in a specific market is; which is also a function of how much risks the market attributes to those properties. So this particular cap rate has little to do with how any particular property is being managed. It's more of an economic metric along the lines of unemployment rate, economic growth, etc. It is no coincidence that cap rate (i.e. "market" cap rate) compresses when unemployment rate is low and economic growth is high. Similarly, cap rate tends to expand during bad economic times.

Cheers... Immanuel

@Samuel Cieszynski

This is why they invented the IRR. All the performance metrics you mentioned (i.e. CoC, ROI, Cap rate, etc.) are snapshot metrics. They are calculated EACH YEAR, so they fluctuate EACH YEAR depending on how you manage the investment (i.e. value adding, incurring capex for higher revenue, leveraging return with financing, etc). IRR is a metric that smooths out the return on your investment as a whole throughout your holding period, not just year by year measure of return.

To answer your question - does paying down the loan lowers your return?. I suggest you calculate IRR of the investment in two scenarios with all other variables held constant except loan paydown (i.e. the variable you're interested in). First scenario is to calculate the IRR assuming periodic loan paydown/amortization until you exit/sell the investment, and second scenario is to calculate the IRR assuming no loan paydown/amortization until you exit/sell the investment.

This will tell you how periodic loan paydown or lack thereof impact your IRR (i.e. your return). My guess is it depends on the AMOUNT and TIMING of cash flow coming back to you during your holding period, which is what IRR measures. The amount and timing of cash flow back to you depends on what you're doing with the property and how you manage it. So it is faulty to say that loan paydown always lowers your return... little or no correlation there.

Cheers... Immanuel

@Jason Malabute

So you're analyzing residential properties??? If you referred to @Rick Pozos post above, cap rate is irrelevant in analyzing residential properties. Like many misguided investors, you can certainly calculate cap rate on residential properties (heck, I can calculate cap rate on my little girl's lemonade stand in the summer time) ... BUT it doesn't help much and it's highly misleading.

May I ask how you use cap rate in your analysis of residential properties?

Cheers... Immanuel

@Jason Malabute

It is very dangerous to make a generalization like that. Forget the fact that San Antonio is a big city,  there are pockets of areas and different classes of properties that have their own cap rates, vacancy rates, etc.

According to the latest census the average family size in the USA is 3.2. Find me ONE family in the whole USA that has exactly 3.2 persons...

Cheers... Immanuel

The good thing about the internet is it's got everything in it. The bad thing about the internet is it's got everything in it. Be careful out there!

Cheers... Immanuel