All Forum Posts by: Immanuel Sibero

@Cody L.

@Andrew Johnson

Cody...Wait! Which side am I on? I'm supposed to be the one having an issue with the way cap rates are used... LOL.

Kidding aside, both you and Andrew have just given great examples of how cap rates are misunderstood/misused and subject to manipulation to say anything you want.

Andrew, in one of my posts in the past I mentioned about a turnkey company (not naming names) who advertised rental houses right here in Dallas (where I live) with 8+ CAP but the comps were LOWER (this is not a fictional example either). They're banking on newbie investors not doing due diligence and snapping up the properties because hey... it's 8+CAP!!

We have had quite a good run up in home prices in Dallas, I wonder how much of this run up is due to out of state investors paying CAP instead of COMPS because well... today's CAP will be tomorrow's COMPS so prices keep rising.

Cheers... Immanuel

@Cody L.

Agreed.

I was just specifically referring to the use of cap rates to value single family rentals (i.e. the OP's question).

As you stated - "... as an investor what the house returns (as measured in CAP) is very much the primary consideration"

In my other posts, I usually add that cap rates are frequently used as a performance metric by investors when comparing alternative investments (even in SFH, duplex, etc) which is fine (although there are better metrics, IMO). As a matter of fact cap rate can surely be used in anything that throws out NOI (which of course includes single family rentals). NOI is what investors are after, so cap rate IS very relevant to investors. But for valuation of an SFH, how relevant is cap rate (regardless of whether you're buying it to live in or to rent)?

Regarding your last statement - again I agree. Many people think valuation based on "cap rate" vs. "comps" are totally different animals. My take is there is a disconnect or misunderstanding there somewhere. These people may not realize that there is really just one way to value residential and commercial, and that is, the use of recent sales of similar properties. So valuation of commercial real estate makes use of the cap rate of similar properties that are recently sold whereas valuation of residential real estate makes use of the sales amount of similar properties that are recently sold. Sometimes I think it helps if we use the terms "cap rate comps" for commercial vs. "sales comps" for residential, but what we usually hear is "cap rate" vs. "comps" which gives the impression that they're two different animals when in fact cap rate is just another type of "comps".

Cheers... Immanuel

@Federico Cantero

Cap rate is not relevant in determining the value (sales price) of a Single Home Rental. Along with several other metrics, cap rate is normally used in determining the value (sales price) of 5-unit or more properties.

You should use recent sales comparables in the area to determine the value (sales price) of a single family home.

Cheers... Immanuel

@Brad E.

You're correct that cap rate is used not only in multifamily investments. It's but one valuation metric for anything that can throw out Net Operating Income. For example, a financial advisory firm (i.e. a business that's drastically different from an apartment complex) can be valued using cap rate.

However, with respect to investments in residential SFH, duplexes, triplexes and quadplexes (i.e. up to 4 unit) cap rate simply has little relevance, particularly when it comes to valuation. Within this space, if you are determined to use cap rates, you could use them to compare potential investments in 1 to 4 unit properties to determine which is likely to perform better (i.e. use cap rate as a performance metric), but even then cap rate is such a poor measure of overall performance of an investment. There are far better performance metrics.

I suggest doing a "cap rate" search on BP to get further insights on cap rate, it's a lively debate and very informational. I learned a lot from it.

Cheers and good luck on your deal... Immanuel

@Brad E.

What type of multi family is it? Duplex, triplex, quadplex?  5-plex? More than 5 unit? Cap rate is one of the valuation metrics normally used in valuing 5-plex properties or larger.

Instead of asking the agents for the "cap rate", how about asking them for recent sales of comparable properties.

Cheers... Immanuel

@Carey Green

Interesting deal. Can you find out why the seller is selling? Why wouldn't the seller (being the savvy accountant/real estate investor) sell the properties individually as condos and keep the 5.2M all to himself?

I'm a newbie and am learning all I can about apartment syndication, so far two things would give me nightmares:

- Overpaying. You lose money by overpaying for crappy properties, you also lose money by overpaying for excellent properties.

- Losing your own money is painful, but losing OPM is just horrifying.

Tread carefully and good luck!

Cheers... Immanuel

@Bryan Templin

As pointed out by @Brian Adams the answer to your question is increasing NOI. Ways to increase NOI can be increasing operating revenues or creating new operating revenue sources, decreasing operating expense or eliminating operating expenses.

I noticed that you are working on a condo and a 4plex. The value of this class of properties are generally determined by recent sales of comparable properties. Increasing the "cap rate" of this class of properties has little to no effect on the value of those properties, if that's what you're really after.

Cheers... Immanuel

@Roger Covin

I think IRR is one if not the best measure of performance when it comes to comparative analysis of investments, it especially shines when analyzing dissimilar investments (i.e. real estate vs. mutual funds). The reason IRR is best is because it looks at an investment in its entirety (i.e. it looks at cash inflows and outflows over the entire life of the investment).

However, what makes IRR a great performance measure is also a reason it's not very practical in some types of investments. Single family rental is one investment type where IRR is just not a practical measure of performance. Some arbitrary but crucial assumptions are needed i.e. how long you plan to hold the rental house, how much you will sell it for. This is why other measures such as Cash on Cash, Rent/Value ratios, GRM are more suitable for single family rentals because they don't require the above assumptions and they merely evaluate the investment on a year by year basis.

I do use IRR when appropriate. An example would be when I evaluate a passive investment in a syndicated deal (whether single family or multifamily). Such deals usually include exit strategies, how long you'll be tied up in the deal and an estimate of sales proceeds at the end.

Cheers... Immanuel

@Roger Covin

I purchased a home in Arlington over a year ago with the following metrics:

- Rent/Cost ratio: 1.33% - cost is all in (includes rehabs)

- Cash on Cash : 12.33% - assumes 5% vacancy, 5% rep/maint, 5% CapEx, and 8% prop mgmt, including property taxes and insurance. I did not finance this property so Cash on Cash could be leveraged higher.

- I don't look at cap rates, they are irrelevant.

The above metrics are not a home run but would pique my interest, I would still look at the area and get a feel for its prospects and desirability. However, I have not found a property like this in over a year now, so I've been sitting on the sideline waiting for the recession.

Cheers... Immanuel

@Rachel Fazio

Properties with up to 4 units (i.e. quadplex) are valued using recent sales of comparable properties, much the same way single family homes are valued. So if you can analyze SFHs then you can analyze triplexes and quadplexes. 

For purposes of valuation, the so called cap rates of the properties up to 4 units are irrelevant. You could calculate cap rates of those properties to compare them and get an idea of which one is likely to perform the best but there are other metrics that do a better job than cap rates.

As far as your question: What would be a good cap rate for the properties in B vs C neighborhood?

- As mentioned above if you're talking triplexes or quadplexes, cap rates are not even relevant. Use sales comparables to estimate value.

- Cap rates are relevant in properties with 5 or more units.

- Even when evaluating properties with 5 or more units, there is no such thing as a good cap rate or a bad cap rate. Cap rates are location/market specific. You can get an idea of the prevailing cap rates in a certain market by talking to a commercial broker familiar with the area. You can make a lot of money buying a low cap property and lose money buying a high cap property.

Cheers... Immanuel