New Investor! Cap rate of 10, looking for some advice.
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[{"id": "ic3wdkg", "text": "If you take a LOC, you may likely be increasing your debt to credit ratio and debt to service coverage ratio. Why is seller selling? First thing that comes to mind if lacking a down payment is a seller carry, carry back or wrap around loan. Lenders will want to see seasoned leases that have provided historical income. They\u2019ll also want to make sure you have enough personal equity and cash to service the loan in cases of gap in tenancy or default.", "replies": [{"id": "ic4527b", "text": "Greatly appreciate the info.\nThanks", "replies": [], "depth": 2}], "depth": 1}, {"id": "ic43l2g", "text": "What makes you think it has a cap rate of 10%?  That would be the first question you should have an answer to.", "replies": [{"id": "ic47uvk", "text": "Excellent point. Seems like a too good of deal on the surface.", "replies": [], "depth": 2}, {"id": "ic4oi1k", "text": "Agreed. This sounds like an industrial building w/ yard storage which are minimally management intensive and really low risk", "replies": [{"id": "ic531jz", "text": "Low site coverage buildings with excess yard is extremely sought after in many urban areas.", "replies": [], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "ic4tr3e", "text": "If you are finding something \"with a cap rate of 10% on this market, then you are not doing the analysis properly.", "replies": [], "depth": 1}, {"id": "ic4we8d", "text": "The first thing I would find out is if the 10 percent cap rate is based on \u201cmarket\u201d rents or \u201cactuals\u201d. You should request the last 2 years of financials to see what the current cap rate is.", "replies": [{"id": "ic4x9le", "text": "Got it, thanks.\n\nYeah it says monthly rent 4500. And listed at 449k.", "replies": [{"id": "ic4yh0n", "text": "Do they have any expenses listed?", "replies": [], "depth": 3}], "depth": 2}, {"id": "ic4ys19", "text": "Based on the math, the NOI would have to be $44,900 at a 10 cap. Since the annual rents are $54,000, the expenses they have listed \u201cshould\u201d be $9,100.", "replies": [], "depth": 2}, {"id": "ic50se8", "text": "The current cap rate is not going to come from the buildings financials.  The cap rate he needs will come from closed analyzed sales of similar properties.  \n\nDirect capitalization is used to value properties that are encumbered by above/below market rents.  If two similar properties have long term leases then $10 over market rents will be valued at a similar cap rate as one with $10 below market rents.  \n\nSo it is the NOI that will be different, not the cap rate.  That will change the value.  Your focus in the valuation should be based on the NOI.", "replies": [{"id": "ic58na0", "text": "? Typically below market rents are lower cap because they are lower risk and have more upside.  Above market has higher cap rate because it\u2019s higher risk\u2026", "replies": [{"id": "ic5i3ej", "text": "Below or above market rents are generally the result of the market at the time of lease negotiations.  \n\nGoogle signed leases during the height of the dotcom craziness maybe at $80sf and then maybe only $40 during the bust.  The risk of having leases with Google above or below market is the same risk.\n\nThe whole purpose of direct capitalization is to reach a value of a \"homoginezed\" NOI dollar at a point in time for similar properties.  If the market is paying $25\n for a dollar of NOI for class A CBD office to credit tenants then a $ of NOI is a dollar of NOI.\n\nNow if I have $100 sf rents and next door is only getting $40 then the impact will be on the NOI and the value, not the cap rate.", "replies": [{"id": "ic5krx1", "text": "You\u2019re wrong.  If I buy a property with above market rents, the risk of my NOI decreasing is significantly higher than at market levels.  In your example, if I buy a property leased to google at 30% over market, it\u2019s an almost certainty that they will go to market levels at expiration, so I will expect a higher percentage return on my investment due to the risk, hence the higher cap rate.  No idea where you got your information.  I analyze cap rates for a living.", "replies": [{"id": "ic5lvpv", "text": "Well, I am a valuation expert recognized to testify in court proceedings and in a work life I derived the cap rates that you may have been tasked to analyze.\n\nThink about the short shelf life of cap rates.  They are measuring today!  Investors will look forward but just to the extent of their holding period.\n\nCap rates don't measure risk.  You are also wrong in thinking cap rates measure \"returns\".  You are also not accounting for the fact that you are collecting double the rents now.", "replies": [{"id": "ic5nezk", "text": "Are you a commercial appraiser too? So am I!  Investors typically look at 10 year cash flows and discount them.  The cap rate is inferred based on that.  Multi family is a bit different as the leases readjust so quickly that direct cap is more applicable.  If you\u2019re testifying in court that varying NOI, no matter what market Rent is, does not impact cap rates, you would get absolutely destroyed.", "replies": [{"id": "ic5p0j1", "text": "If you are collecting data over 10 years you are not analyzing cap rates.\n\nThe formula is V=i/r.  The V stands for the Value you are trying to solve for.  The i i  is the NOI the property is capable of producing based on a 12 month period.  And the r stands for cap rate that are calculated by third party professional parties on analyzed CLOSED sales. \n\nNow there are many metrics that investors can use to guesstimate their return but that is not cap rate.  Cap rate is to determine probable market value that you need to do the other calculations.\n\nPS. An expert that doesn't know what he is talking about doesn't get to be an expert.", "replies": [{"id": "ic5pize", "text": "Lol.  You back into the cap rate when analyzing properties.  The sale price is a known dollar amount, and so is the income.  The cap rate is the variable rate based on a ton of different factors.  Based upon your post history, you don\u2019t understand this concept.", "replies": [{"id": "ic8dot4", "text": "No, you want to solve for VALUE.  A property in Memphis can generate $100,000 NOI and the same in San Francisco.  The cap rate that similar properties have sold for is fixed.  The VARIABLE is what investors have paid for that $100,000 NOI.", "replies": [], "depth": 10}], "depth": 9}], "depth": 8}, {"id": "ic5qc9s", "text": "U/b6passat. I explained the process of using cap rates.  You stated \"Investors typically look at 10 year cash flows and discount them. The cap rate is inferred based on that.\"  I would like you to explain that.  10 year cash flows from where?  What is the formula to then \"infer\" a cap rate?  \n\nI think you will bail.  I", "replies": [{"id": "ic5qj3l", "text": "They forecast cash flows to determine their purchase price based upon the annual rate of return they are comfortable with.  The year 1 NOI is then divided by that purchase price to infer a cap rate.  This is income approach 101", "replies": [], "depth": 9}], "depth": 8}, {"id": "ic5qrie", "text": "You also stated \"If you\u2019re testifying in court that varying NOI, no matter what market Rent is, does not impact cap rates, you would get absolutely destroyed.\"   Can you explain?  I think you are probably just confusing fee simple and leased fee cap rates.", "replies": [{"id": "ic5rbma", "text": "? Not every expert opinion is on fee simple tax appeal work.  I\u2019ve done plenty of leased fee expert witness testimony for civil trials of for investment groups, developers, etc.", "replies": [{"id": "ic5rzfx", "text": "That is not what I stated.", "replies": [{"id": "ic5sie6", "text": "Expand then.  Technically, a few simple property (excluding multi family as that\u2019s debatable on if it\u2019s fee or lf) doesn\u2019t have a cap rate.  Any time an investor is looking at leased properties they consider the lease terms, which impacts how much they are willing to pay.  Credit, lease term, above and below market rent, condition, demographics, etc. all come into play.  At the end of the day, the cap rate of a comparable is just an inferred rate based upon in place or year one pro forma NOI depending upon what market you\u2019re in.  They can vary greatly.", "replies": [{"id": "ic5t8c0", "text": "For cap rate purposes what would be the difference between leased fee and fee simple in multifamily?  It would be negligible and surely not worth any debate.  I think you are just starting to throw things out to muddle the discussion.  \n\nShoots, let's just start with your claim that the cap rate \nmeasures risk and return.", "replies": [{"id": "ic5u5pw", "text": "If I have a rent roll with significantly under market rental rates on a multi family property, the cap rate using existing income is lower than one at market levels, because I have upside to raising rents.  How do you not understand this concept?  You don\u2019t think cap rates measure risk.  Take a sale of a fedex industrial property with 5 years left on the lease, and the sale of an identical property leased to a local non credit tenant with same rent and lease terms.  The fedex property will sell for a lower cap rate all day, as the risk of default is lower.", "replies": [{"id": "ic5wdgx", "text": "1.  Please show me how you got the cap rate on your below market rent roll.  No sense moving on since you won't be able to accomplish this but have at it and then I will show you exactly how it is done.  This is going to be fun.", "replies": [{"id": "ic5y8k9", "text": "Are you capping in place or pro forma market NOI?", "replies": [{"id": "ic5zn8s", "text": "What would you do?  This is your example, remember.\n\nYou da guy that went from cap rate analyst to commercial appraiser to expert witness.  LOL!\nShow me how but quit stalling.", "replies": [{"id": "ic62lt9", "text": "? A key role of my job as a commercial appraiser is to analyze cap rates\u2026. My experience (over 15 years) had led me to become an expert witness in a number of trials related to tax appeal, investor fraud, developer fraud, and a few right of way cases.  What are you so confused about?  I\u2019m not going to post my licenses and credentials on Reddit.", "replies": [{"id": "ic6309q", "text": "Geez!  This is the simple question you are so squirmy about answering. \n\"Please show me how you got the cap rate on your below market rent roll. No sense moving on since you won't be able to accomplish this but have at it and then I will show you exactly how it is done. This is going to be fun.\"\n\nYour honor,  please direct the witness to answer the question. \n\nNobody asking to revel your degree from biggerpockets University.", "replies": [{"id": "ic639ab", "text": "Show an example of a property with below market rent and an extremely similar property with at market rent selling for identical or nearly identical cap rates.", "replies": [{"id": "ic63npt", "text": "So you are admitting you can't answer my question about what you said?", "replies": [{"id": "ic647hi", "text": "If I have a fedex property at a 6% cap rate, and I have an identical one at a 6.5% rate, but they have an above market rental rate, how would you explain the difference?", "replies": [{"id": "ic64qjm", "text": "Too embarrassed to admit you can't answer my simple question?  Answer mine and then I'll answer yours.  Isn't that fair?", "replies": [{"id": "ic65hbf", "text": "State a clear question and I will answer and educate you.", "replies": [], "depth": 23}, {"id": "ic65sr5", "text": "Ask a clear question\u2026. I\u2019m old, maybe I missed a previous one.", "replies": [{"id": "ic66783", "text": "I posted it twice in response to what you claim YOU do.  \n\nThink it over, I'm going to bed.  I'll be back in the morning to see you explanation of how you do what you claim you do.", "replies": [], "depth": 24}, {"id": "ic66ipu", "text": "Third times charm.\n\nPlease show me how you got the cap rate on your below market rent roll. No sense moving on since you won't be able to accomplish this but have at it and then I will show you exactly how it is done. This is going to be fun.", "replies": [], "depth": 24}], "depth": 23}], "depth": 22}], "depth": 21}], "depth": 20}], "depth": 19}], "depth": 18}], "depth": 17}], "depth": 16}], "depth": 15}], "depth": 14}], "depth": 13}], "depth": 12}], "depth": 11}], "depth": 10}], "depth": 9}], "depth": 8}], "depth": 7}], "depth": 6}], "depth": 5}], "depth": 4}], "depth": 3}, {"id": "ic5zzqy", "text": "I disagree. He can cross check the financials that are being used to arrive at the 10 cap evaluation.  Source:  I own 600 multi family, office, and industrial units and do this on a daily basis.", "replies": [{"id": "ic62baj", "text": "Please show me how you do all this cross checking of financials.  ELI5.  With all your  properties and daily experience this should be easy.\n\nI want to know how the heck this 10% cap rate happened and how he would use it?", "replies": [{"id": "ic64770", "text": "As a buyer, If a property is for sale and advertised at a 10 cap then the NOI divided by the sales price will be .1  If it is not .1, then the cap rate advertised is not accurate. Sometimes agents list properties with a higher pro forma cap rates based on \u201cmarket\u201d rents, however a buyer should proceed with caution if actual financials aren\u2019t being used.", "replies": [{"id": "ic81x21", "text": "So I use the properties ACTUAL finances.  The seller wants $10 for each dollar of NOI.  You spend time seeing if his math is correct.  OK it is correct.  You just wasted your time.  \n\nThe correct thing to do\n\nWon't let me edit.", "replies": [], "depth": 6}, {"id": "ic87slq", "text": "You would validate the $44,900 NOI.  Then find out what cap rate  similar properties have sold at.  If 15% then $299,333=$44,900/15%!!!   I just saved OP $169,000.", "replies": [], "depth": 6}, {"id": "ic8861h", "text": "If the cap rate comps are 15% then $299,333=$44,900/15%\nI just saved OP $169,000", "replies": [], "depth": 6}], "depth": 5}], "depth": 4}], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "ic5blk0", "text": "Cap rate of 10% ? \ud83d\ude02", "replies": [], "depth": 1}, {"id": "ic63f21", "text": "Hey u/NoLiving1467.  Why did you bail?  You threw out the 10 cap.  You are a new investor and should be able to answer my question if you are going to throw it around.  Otherwise scammers will know you are green and take advantage.", "replies": [], "depth": 1}]