Help newb: cap rate for multi-unit property in LA?

Discussion in 'Economics' started by jasonjm, Oct 11, 2006.

  1. jasonjm


    hey all, I know there are a lot of smart people in this forum...

    I have a real estate question, if anyone can help me, because I know not much about real estate. All I understand is that capitalization rate seems to be a key thing:

    IGNORE the housing bubble theory for now, the question is pretty simple:

    If I were to buy a 5 unit apartment building in west los angeles CA, what realistic cap rate should I be working on with the current market conditions?

    what would a good real estate investor be aiming for to consider this a deal that makes sense? what cap rate?

    thx v much in advance
  2. I'd want the cap rate to be at least the cost of long-term financing but I doubt that's possible anymore due to the soaring prices out there.

  3. jasonjm


    ok, so I should be aiming for like cap rate of 7?
  4. Higher. With a 7 cap, you likely won't even be able to cover your mortgage payment.
  5. JGTrader


    Do a search on for what similar places are selling for.
    (Most caps are overstated due to incorrect vacancy rates, insurance premiums and prop taxes) but it will give you a decent idea of the market.

    For fundamental analysis of the market check out Hendrick & Partners report on southern california
  6. jasonjm


    thanks for the replies all

    hehe man this property looks bad, here are some numbers for you all still in this thread

    5 unit residential
    asking price $1.9 mil

    rent from 5 units per month, $8600

    property tax would be $23750 per year
    maintenance costs are running about $10k per year
    water is running about $3k per year
    I have no idea what earthquake and building insurance would be

    so, do those numbers look really bad, or really really bad?

  7. Obviously the numbers don't tell the whole story, eh?

    What's the conversion value of rental units into condo's. If each apartment would go for 400-500k then 1.9 for 5 apts is a discount.
  8. JGTrader


    The operating expenses on a 5unit should be about 35-45% of gross rents.
    Once you factor in 10% vacancy (the bank will use this number) plus all your operating expenses there isnt even enough revenue to cover expenses.
    Especially with insurance at half a percent.
    Then you add in the mortgage and it gets worse.

    Right now the condo market is pretty weak so converting it would be a capital intensive, time consuming and after all said and done not very profitable.

    The numbers are much better out of state if you are looking for cash flow.
  9. I'm a R/E Agent in Canada, so no insight on LA real estate. But don't get too caught up with CAP rates, use them as a general rule of thumb to quickly short list possible properties.

    You should take into consideration tenant mix , turnover, vacancy, comparable rentals in area. Eg if its a lot of work to collect rent, fill vacancies, constant damage/turnover due to low grade tenants etc etc You want your CAP rate higher. Same as having Joe's Dept Store VS Walmart, Who do you think will pay on time, everytime? Risk vs Reward, and should be reflected in the CAP.

    Also don't believe any of the financial data the listing agent is supplying you with, they may just be regurgitating what the Vendor has supplied to them, so do your DD. It might not seem like much, but research vacancy (2-5%), management fees(3-5%), repairs/maintenance, roof age, boilers/mechanical etc. Just so you can see the relevance, for every $10,000 in exp. @ 7% CAP that's $142,000 off the price! So you can see why some Vendors might not be so forthright with all the numbers.

    Hopefully this should just get you started.

    Good Luck and take your time.
    #10     Oct 12, 2006