NNN properties vs multi family CAP are similar why?
I am in process of doing a 1031 and looking at NNN single tenant properties and also multi family complexes why are the caps so close when one is passive and the other requires work. Multi family is a lot more hands on then a NNN property but in Phoenix, AZ where I am looking the caps for both are around 4.5% why is multi family not a higher cap then NNN?
[{"id": "ikb4bkp", "text": "Rental rate appreciation", "replies": [{"id": "ikb7isp", "text": "With the crazy appreciation we have see I just can not see it being sustainable but I guess still probably higher then 2% annual increase a NNN gives you.", "replies": [{"id": "ikb8ykb", "text": "I just read an article saying the US is short nearly 4 million housing units. Those people have to live somewhere.", "replies": [{"id": "ikbio3m", "text": "Where do they live now? With the uncertainty about coming recession and home sales slowing down those people will continue with their current situation probably", "replies": [{"id": "ikcspdm", "text": "This is the right question - where are those people living now?", "replies": [{"id": "ikdpwim", "text": "Family, with roommates, etc. It means demand is there for them", "replies": [{"id": "ikf09bu", "text": "Don't forget van down by the river.", "replies": [], "depth": 7}], "depth": 6}], "depth": 5}], "depth": 4}, {"id": "ikbllpn", "text": "You can\u2019t take a top down view we are short on housing.  Boise, which was the darling is about to get smoked with crazy price drops.  \n\nMajority of the new product being built isn\u2019t affordable, it\u2019s 1500 to 2000 for a tiny studio in markets like phoenix, seattle, Atlanta, dc, SLC, Austin, etc.  \n\nIt\u2019s garbage product and folks are no longer doing real research but coaching appraisers to get a number.", "replies": [], "depth": 4}], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "ikb57mq", "text": "Cap rate compression causes risk adjusted returns (spreads) to narrow.", "replies": [{"id": "ikb7lrp", "text": "I think I understand what you are saying but can you dumb it down in simpler terms. lol", "replies": [{"id": "ikb8yre", "text": "There aren\u2019t any good deals anymore \ud83d\ude01", "replies": [], "depth": 3}, {"id": "ikbvc94", "text": "The more expensive it is, the less return you make", "replies": [], "depth": 3}, {"id": "ikc8syy", "text": "When cap rates lower, the amount of risk involved becomes less reflected in that rate. The spread in cap rates between low and high risk properties is much smaller when rates are low.", "replies": [], "depth": 3}, {"id": "ikdzpxn", "text": "The replies below more or less capture it. But said with a lot more words...\n\nCap rates are best thought of as a measure of risk. Yes, it's also the unleveraged rate of return at a given price. But in general, a lower cap rate property is (or should be, in theory) lower risk than a higher cap rate property, all else being equal. \n\nSo take 2 properties with the same NOI, one with say a 4% cap and the other with a 6% cap. The 6 cap place has a higher return because it's more risky. So it has a lower price to reflect that risk.\n\nThe difference between those cap rates and the risk-free rate of return (say for the sake of argument it's 3%...usually we use the 30 year treasury) is the spread. So in this case the spread on the 4 cap is 100 basis points (bps). The spread on the 6 cap is 300bps.\n\nNow, let's factor in changes in demand. That could be fueled by things like historically low interest rates, the Fed injecting trillions of $ into the economy, or whatever. So now more buyers are chasing these two properties. That will do 2 things:\n\n1) cause prices to go up which means cap rates to go down \n\n2) cause spreads to narrow\n\n\\#1 happens by definition (bc the denominator, price, goes up). So ket's look at #2, spreads narrowing. Buyers chase the 6 cap property and drive the price up, and someone buys it at a 5 cap. So the spread there has narrowed from 300bps to 200bps. Buyers chase the 4 cap property too, such that the price rises to drive the price to a level resulting in a 3.5 cap. The spread there has narrowed 50bps.\n\nA couple of things here. Why wouldn't the 4 cap go down to a 3 cap, the same 100bps compression that happened to the 6 cap place? Because theoretically then you'd just buy the 30 year treasury right? Risk free. As an investor you require \"some\" premium above the risk-free rate. Now note that the two properties are only separated by 150bps whereas they started at 200bps apart. The spreads have compressed.\n\nNow take this to an extreme, which is where we've been for some time. There is so much money chasing properties that cap rates compress to the point where there's hardly any difference in cap rate between e.g. a class A and class B building. There's some (or should be) but hardly any.\n\nNow think of what happens in reverse. As demand dries up, prices drop. But what happens (or should...) is that the price of the riskier assets should drop more, such that their cap rates (or more specifically the spread between risk-free and the cap rates) should return to historical levels.", "replies": [{"id": "ikfbnqf", "text": "Cap rates do not measure risk or returns.  Cap rates measure value as part of an income approach to value called direct capitalization.  V=i/r", "replies": [{"id": "ikj03vx", "text": "LOLWUT. Cap rates absolutely positively are a measure (or reflection) of risk.", "replies": [{"id": "ikj20qn", "text": "How?", "replies": [{"id": "ikk0v4v", "text": "Seriously?\n\nTwo properties. Meaningfully identical except for a single factor, e.g. location. One has a 5 cap, the other a 6 cap. The 6 cap is priced as such because it is riskier than is the 5 cap property.", "replies": [{"id": "ikk6lmd", "text": "Maybe, maybe not.  You said a cap rate measures risk.  What is the measured risk between 5 &amp; 6%?  1%,20%?\n\nWhat if the difference was because of rents?  \n\nSee, cap rates do not measure risk.  They measure value to the penny though.", "replies": [{"id": "ikkhbpr", "text": "Remember the part about being exactly identical except for one factor? The risk captured by the distinction in that one factor is represented by the difference in cap rates.\n\nI'm doing going in circles with you because you obviously don't understand. But I've only been in CRE for three decades so what do I know?\n\nHappy to cede the final word to you as an insistence upon it is a sure sign of a feeble mind and an even more feeble argument.", "replies": [{"id": "ikkpht3", "text": "I asked a simple question.  You cannot answer it.  And now you want to claim similar properties in different locals will have the same rents!!!  In fantasy world maybe.\n\nMy example is based on actual numbers.  Philly Class A office rents for $20sf.  SF office rents for $80 sf.  Philly sells for 7% cap and SF for 4%.  I would argue that their risk is similar but Philly has way less NOI per sf so any capex based on sf is going to take possibly a 4 times bigger bite out of that NOI.  THAT is a major reason the NOI is so much cheaper, NOT the risk.\n\nHOW CAN YOU NOT UNDERSTAND THAT?", "replies": [], "depth": 10}, {"id": "il00vyf", "text": "So you u/FitzwillamTDarcy  cannot participate in a discussion of how capex affects cap rate (value of NOI) but claim to be an investor!  Geez.", "replies": [{"id": "il35wqm", "text": "LOLWUT. Tell you what skippy, head on over to fatfire where my 8-figure NW is mod verified, nearly 100% CRE. And while you're at it please do point out where capex was even mentioned in this exchange prior to your comment. LOL.", "replies": [{"id": "il4jkze", "text": "https://m.youtube.com/watch?v=vJXsW1ER5hw&amp;t=2701s", "replies": [], "depth": 12}], "depth": 11}], "depth": 10}], "depth": 9}], "depth": 8}], "depth": 7}], "depth": 6}], "depth": 5}], "depth": 4}], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "ikb6n0a", "text": "Multi-family easily filled due to imbalance of housing; many units to diversify default risk. Easily adjusts to market rent.\n\nNNN:  One company's risk.  100% of the space.  Pricing assumes renewal of all options to extend. Rents may be a scheduled rate of appreciation; irrespective of true inflation.  Remember what happened to *Blockbuster's* landlords? Ever heard of a company named *Blockbuster?*  They paid above market rent.", "replies": [{"id": "ikb7ja7", "text": "To add to this, multi-family useful life can go 50-70 years or more.\n\nNNN are often times purpose built. 25-30 yr useful life on NNN is common (even with strip malls).", "replies": [{"id": "ikb9vy1", "text": "Yeah I can see this but all the multi family properties in the 2m to 5m range in phoenix are like 50 years old and they remodel them. I have a hard time paying a 4.5 cap for a 50 year old property. I feel like I could buy newer houses and rent them at a 5 cap. Why do people buy these complexes instead of just buying multiple homes and renting them out. I feel a home is going to appreciate more then a 50 year old apt complex that has been updated.", "replies": [{"id": "ikbf52q", "text": "Ur AZ 10 unit has 1 roof, 1 sewer line and if a vacancy is only 10%. Equivalent might be 5 SFH, now you have CAPX times 5 and each vacancy is 20%. At the end of the day you\u2019ll have less cash flow, likely more appreciation. so pick your poison, cash flow or appreciation.", "replies": [], "depth": 4}, {"id": "ikcavl7", "text": "MF outside of AZ ezpz 7+ enjoy", "replies": [], "depth": 4}, {"id": "ikddtnf", "text": "Research forced appreciation", "replies": [], "depth": 4}], "depth": 3}], "depth": 2}, {"id": "ikb85p0", "text": "Yes I feel like I need to find a property that is in a great area that could easily be re leased to another tenant. I am looking at drive thru coffee shops as I think if your tenant left you could find another coffee shop to go in with minimal TI.", "replies": [], "depth": 2}, {"id": "ikbcq2m", "text": "Erols &gt; Blockbuster", "replies": [], "depth": 2}], "depth": 1}, {"id": "ikb9q3h", "text": "Many investors feel more comfortable with apartments because that's what they are more familiar with.  Your risk on owning a single asset is a little bit more spread out with many tenants.  Some types of commercial properties like retail malls run the risk of going dark and failing all together.  Office and hotels require regular fresh TI's / total refurbishments.  Industrial space, if too unique, can become totally obsolete.  Nothing is absolutely risk free!\n\n&amp;#x200B;\n\nI agree with you the risk adjusted return doesn't always make a ton of sense, i think a lot of people stay in their own lane, go with what they know, and are not so opportunistic between the different classes of CRE.  What you are seeing is true across the board.", "replies": [], "depth": 1}, {"id": "ikbdyur", "text": "Phoenix SFH prices exploded and became overpriced, so investors went to MFH which is now overpriced. \n\nNnn hasn\u2019t moved as much yet. Nnn is slower to adjust to market.\n\nMy 2c, look elsewhere. Buy MFH that is rural-ish, or find a SMB with RE and 1031 there if you have time.", "replies": [], "depth": 1}, {"id": "ikbl64r", "text": "Usually, the cap rates should be different.  \n\nFor the NNN, are you dealing with super strong credit tenant or is the lease about to roll to lift rents to market? Main reason why there cap rates might be comparable.  \n\nIf you buy a brand new multi that\u2019s stabilized, the cap rate should be higher unless you are buying in the burbs.\n\nCore vs suburban cap rates can be 50 to 150 spread in some locations.\n\nPhoenix is starting to cool down with buyers walking away from deposits as financing becomes more challenging!!\n\nWithout seeing numbers and logic, hard to tell.  Also, cap rate can be BS!  Is it a T1, T12 or is the broker taking out a bunch of stuff out of OP EX to solve for a number??!!  This happens all the time, value add MF don\u2019t run at a 25 percent expense weight as you see in OMs from some of the shops in that market.  \n\nBe careful!! And do your homework but doing good might scare you off from buying an asset", "replies": [], "depth": 1}, {"id": "ikbxv37", "text": "If most of the multi-family you\u2019re seeing is 50 years old and has been remodeled, that means that location has been able to perform as a multi-family property for 50 years, even though there\u2019s been a ton of new product brought to market in AZ. \n\nIf you were looking at a STNL deal where a tenant had been performing for 50+ years (with reasonable remodels and some kick-in from LL) you\u2019d say that\u2019s a hell of a location. So would the tenant. \n\nIn my opinion the only difference would be existential threat. No one thinks McDonald\u2019s or the like is going out of business, but there\u2019s also a lot of people who thought their CVS would never become a Dollar Tree and they\u2019d have to try to renew at their rates. Corporations are uncontrollable, but some new laminate flooring and countertops are", "replies": [], "depth": 1}, {"id": "ikc0kw8", "text": "Everybody and their mothers are buying multifamily in Phoenix right now. Not only that, but there's an explosion of lender and investor capital flowing into that asset class. Phoenix has experienced 6-8%+ YoY rent growth consistently that few years. \n\nLots of dollars chasing deals means compressed cap rates that tend to decouple from risk profiles, flowing price premiums to sellers.", "replies": [], "depth": 1}, {"id": "ikceck5", "text": "u/honobob get in here and drop some cap rate knowledge on these people", "replies": [{"id": "ikcohut", "text": "I need it like I need the air that I breathe. Let\u2019s get some I=r/v or whatever the fuck talk going on. I want arguments about how much people are paying per dollar of NOI where it always works out to be an exactly like $5 or $10. Geez!", "replies": [{"id": "ikf94h8", "text": "Hahaha\u2026 I sent up the CAP signal. He responded.", "replies": [{"id": "ikfaefi", "text": "With great power comes great responsibility.   Don't misuse the CAP signal.", "replies": [{"id": "ikfbsb1", "text": "Yes!! This is good stuff. From now on, when I need to tag you, I\u2019m calling it the CAP signal! You gotta keep \u2018em honest when talking about cap rates.", "replies": [], "depth": 5}], "depth": 4}, {"id": "ikfdez6", "text": "Capman won't leave you hanging.", "replies": [], "depth": 4}], "depth": 3}], "depth": 2}, {"id": "ikf1rym", "text": "Hey, I'm at my Bay Area home for the summer so I don't have the 3 hour time zone difference to keep up.  But thanks for the CAP signal.\n\nIt is all about supply and demand and anticipated profits.  Right now you have \"syndicators \" in the MF market.  These are people teaching violin 4 years ago but thanks to the internet and a 10 year run up they are convincing lazy investors to throw money at a product that they probably shouldn't.   It's musical chairs that you need to know when to get out.\n\nThe cap rate is what it is and is based on the expectation of the person with the most money but maybe not the most experience.", "replies": [], "depth": 2}], "depth": 1}, {"id": "ikdp9d7", "text": "Just as an FYI, you don't need to do a 1031 exchange to avoid paying capital gains taxes.  I've been a real estate investor for 20 years.  I switched to a trust almost 2 years ago.  All capital gains taxes are deferred in perpetuity.  Much more convenient than having to rush around trying to find a replacement property.", "replies": [], "depth": 1}, {"id": "ike568p", "text": "I remember in 2000, seeing a NNN with a chain restaurant, at 10%\n\nThose were the good old days \u2026", "replies": [{"id": "ikf4v7i", "text": "You buy in the market you are in.  There were reasons investors would only pay $10 for NOI.", "replies": [], "depth": 2}], "depth": 1}]