Cap rate, rent rolls, etc.

All market-rate rentals?

10x rent roll, no?

Around 10x rent roll, maybe 12x, assuming market rate rentals. Might not get there in the next decade, but I'm fine with that. Plenty of other places to invest...

West81: assume one case all FM and one case mix of RS/FM (say 50-50)

UD: 10x net or 10x gross

It's calculated on net.

Here's my admittedly rigorous, fast and dirty formula:

The monthly rent must at least equal 1% of the purchase price. I learned this from my business partner, and he's making a lot of money just for telling me this one thing (oh, and a few other little things)

So if you're going to pay $900,000 for a rental property, you need to get $9000 a month in rent.

No can do in Manhattan, you say? Hell no, I know that, that's why I don't invest in Manhattan. I invest elsewhere so I can afford an apartment in Manhattan, which is even more fun than owning a rental property there.

I think Manhattan works as a long-term investment but I'm too old. It's also good as a safety investment, especially if you buy in a blue-chip 'hood, because the markets I invest in do carry somewhat more risk. (Or, at least I used to think so.....I'm not so sure now.)

But if what you really want is nice checks in your mailbox every month, this is the formula that works. I try to buy occupied properties with good working tenants and good leases in place.

{Manhattan real estate agent.}

What I've seen are deals happening very quickly at 14X net rent roll (mix of RS/FM). Places are still languishing on market (though no chance of foreclosure, long-time LLs with no recorded mtge) at around 20X net
(mix of RS/FM).

The deals happening around 14X net rent roll are (I'm speculating) also cases where the buyer is willing to do owner-occ. evictions. Otherwise, asking prices are still not approaching even 14x net rent roll.

examples please

lately it has bee 10X the net income, if the apts are mostly FM.

not to long ago, it was 16-18

Folks, it's not 10x rent roll in Manhattan. It's more like 14-20x rent roll and real cap rates of 5% and below. That is why nothing is getting done. In today's market, the majority of investors demand 8% real cap rates for touching anything.

There is an enormous disconnect in the investment market, and that is why the banks are going to take it on the chin again.

Just as a point of reference, apartments are still selling above 20x comparable rent, which is absolutely absurd.

check out the last few months of sales at http://therealdeal.com/deals/commercial

I only see one cap rate below 5%...

mav, nice post. there's some great information in that chart.

MAV: those are commercial properties or larger res. buildings. I'm talking about multi-unit townhouses on the UWS, so. of 96th.

For the 14X net rent roll example, I'm thinking of 123W85 (only all cash offers, closing within 2 weeks). Big pile-on on of bidders at 2.2m price point, 191k gross rent, 150kish net rent.

I have not seen any other multi-unit townhouse come close to 14X net rent roll, unless I'm missing something.

Cap rates seem way low for these properties, wondering when that's going to change. I troll ACRIS and look at mtge #s for potentially distressed sellers, and I'm not seeing any pressing urgency to sell S. of 96th as I don't see huge recorded mtges for multi-unit non-owner-occ THs.

I have a rental in a townhouse.

It is currently being offered for sale at a 3.4% cap rate.

As I understand it townhouses are, indeed selling at this cap rate as "private residences." Hence, my landlord's desire to cash out at a pretty price.

Investors who have looked at the property, though, are requiring a 7% to 8% cap rate. If you believe that rents will just about keep up with inflation over the long term you might expect rents to grow around 2%. (Not this year or next, but over the long term. That would be in line with breakevens on TIPS.)

The strange thing to me is how differently the property is viewed by "investors" and those looking to own a "private residence." You can drive a truck through the two cap rates. I can't help but think that the "residential" cap rate will begin to rise significantly over the next few years. I don't believe that over history one has normally seen such disparities between "investor" and "residential" cap rates.

"Investors who have looked at the property, though, are requiring a 7% to 8% cap rate. If you believe that rents will just about keep up with inflation over the long term you might expect rents to grow around 2%. (Not this year or next, but over the long term. That would be in line with breakevens on TIPS.)"

you should expect rents to follow wage inflation over the long term (as they are already too high with respect to incomes thanks to the bubble entering a period of very high unemployment...)... htat means... rents should go down. plenty of people were paying more than 30% of their income on rent. imho that's soon gonna be a thing of the past.

"The strange thing to me is how differently the property is viewed by "investors" and those looking to own a "private residence." You can drive a truck through the two cap rates. I can't help but think that the "residential" cap rate will begin to rise significantly over the next few years. I don't believe that over history one has normally seen such disparities between "investor" and "residential" cap rates."

did it happen cause residential buyers were not even doing the math of closing and carrying costs? they were 100% putting their faith behind appreciation of a depreciating asset.

Topper: I think that if it is all possible to pursue owner-occupancy eviction and if you are able to get possession of the RS units without spending much time or money, that's an immediate gain in your cap rate. That's what I think sellers of these properties are promoting to potential buyers at the lower cap rate.

If the townhouse is too fragmented and there is an RC tenant making it hard to pursue owner-occ, then there is no way you can sell it at a low cap rate.

As far as I can tell, so. of 96th, owners fall into these categories (based on ACRIS filings):
1) Small-time landlords who own a clutch of multi-unit THs, bought many years ago, with small or nonexistent mortgages. Occasionally, they may sell some or all of their portfolio -usually triggered by a death of a principal.
Some deals to be had if they misprice properties, but usually not a great urgency to sell.
2) One-property landlords who live in their properties & rent some units out. They have larger mortgages, but have enough tenure that their rental units should cover their debt service payments.
3) Single-family townhouses - depending on when the owner bought & the profile owner, may have huge mtge or may have none. So far not a source of distressed sales. Best deals arise from estate situations (place usually needs
updating).
4) Small-time investors who bought a multi-fam, with the idea to do high end reno to convert into owner's quarters + high-income rentals or single-fam. For whatever reason, the reno has stalled, they are behind on their mortgage
payments (usually maxed out mtge) and they are desperate. I have seen a couple of these lately, but the cap rate
is still way too low to consider for a true investment property.

"there is an RC tenant making it hard to pursue owner-occ, then there is no way you can sell it at a low cap rate."

how did this rent controlled tenant made it into this unit? in exchange for lower taxes for the owner?

"4) Small-time investors who bought a multi-fam, with the idea to do high end reno to convert into owner's quarters + high-income rentals or single-fam. For whatever reason, the reno has stalled, they are behind on their mortgage payments (usually maxed out mtge) and they are desperate. I have seen a couple of these lately, but the cap rate is still way too low to consider for a true investment property."

one would expect this to become very common, given the fad of buying a TH for this purpose. but ... i don't see it happening across the board while vacancy rates on rentals keeps being fairly low. if it goes up by a lot, then yes, this TH "owners" are in big sh*t.

As an fyi, the townhouse in which I live has just four units and can be delivered vacant to a new buyer within a year's time.

admin, in exchange for renting before 1974 or whenever it was.

nyc10023, re: your category #1, have you ever looked at 266 WEA? Situation you describe, only changed hands when the last of a set of siblings died, IIRC. Looks as if executor sold to a relative.

Cap rates are for a perfect world.
Perfect World equals
1)A tenant who barring a natural disaster pays their rent on time and will stay in business. (commercially)
A tenant who has great stabiltity (job security/assets) in their ability to pay and maintain their rent on time.(residetially)
2) A property in reasonable condition where maintenance is average.I've seen many fluctuations in building expenses ranging from low, 15% expenses on gross income to high, 50% expenses. Taxes can really skew this. 25% is quite average in normal times in normal buildings.
3)A stable equity growing market. 5% to 10% a year? Non inflation adjusted and where inflation is normal (what? 3%?)
See cap rates are great when you have 7/8 years of ridiculous equity growth based on a solid rental market, steady and normal interest/inflation rates, and great tenants.
But one bad year destroys a cap rate for 5 years.

We are no longer in a cap rate world, there is too much risk for a minimum 2/3 years.

And most products I've seen and leaving equity growth out are at breakeven cash flow at 10x to 13x rent roll. And that is gross rent roll. Which is affected by whether the expenses are closer to 50% or 15% expenses on gross income.

Any property at 14x times gross rent roll will be in the negative. And in this climate, the days of buying on "potential" like some rent control tenants leaving or air rights is just silly.

"admin, in exchange for renting before 1974 or whenever it was."

you are saying that any rental before 1974 was rent controlled?

Admin: it's not caught on as much as one would think because the inventory has never been huge.
From wikipedia:

To qualify for rent control, a tenant must have been living continuously in an apartment since July 1, 1971. When vacant, the unit becomes rent stabilized, except in buildings with less than six units, where it is usually removed from the program. In some cases, a tenant living in a one- or two-family home may qualify for rent control if the tenant has lived there since 1953, however, once the apartment or home has been vacated the home or apartment (if in a two-family) is deregulated.[4]

In apartments within single and two-family homes, the tenant must have been residing in the unit continuously since March 31, 1953 in order to qualify for rent control. Once the unit becomes vacant, it leaves the rent control program and is not eligibile for rent stabilization.[4]

Rent control does not generally apply to units built after 1947.[4]

Mav
"not to long ago, it was 16-18"

Agreed for Manhattan, when I saw something both for rent and sale, usually the sale price was 200 times the monthly rent ask which works out to 16.66 times.

sample;
$3000 month rent $600,000 for sale.

600,000 divided by 36,000 = 16.66

"The strange thing to me is how differently the property is viewed by "investors" and those looking to own a "private residence." You can drive a truck through the two cap rates. I can't help but think that the "residential" cap rate will begin to rise significantly over the next few years. I don't believe that over history one has normally seen such disparities between "investor" and "residential" cap rates."

This is one of the reasons I've been screaming for years that WHENEVER the market turned around, it wouldn't be a "soft" 5% to 10% correction like all my colleagues thought/claimed. And here is the reason why: in general, there are 2 types of buyers: those who buy on the numbers and those who buy on emotion. But don't get too caught up on those 2 words. They could just as easily be conservatisism and momentum. What I mean is this: there are the "be now or be priced out forever" types (let's call the "believers") and the "I don't give a shit what the market is doing, I'm not making an investment decision which doesn't work on paper". The example I usually gave was a condo selling for $700,000 which you could rent for $3,000. i won't go into all the calculations since we've had so many threads about it already, but cut to the final analysis, which is that the believers would end up saying "well, if I include all my tax benefits, it's only going to cost me a little more to buy than to rent". The "non-believers" were more like "condos should trade at 100 times monthly rent (because for a long time, that is what they traded for). So, you don't need the world to end, you don't even need interest rates to rise: all you need is a shift in buyer confidence (i.e. shift in the heard mentality) for prices to go from $700,000 to $300,000.

Well, commercial buyers have always tended to be much more in the realm of non-believers. So that's why you are seeing this wide gap in what they are looking to pay. but remember, it isn't always this way, and in the very recent past you saw cap rates at very different numbers since you have commercial buyers who "had to buy", and could only buy what was being offered for sale, so even they bought at the much lower cap rates because that's all that was on the market. Now, a lot of the same people who "had to buy" (and they "had to buy because they had money "pushing" on them to buy, and a lot of THAT kind of money has evaporated) no longer "have to buy" and the very same people are looking at deals based on the actual numbers as opposed to "a shark must keep swimming".

Is it still 14x the rent roll? The thread is 5 years old

I really miss Inonada. I am only one data point, but as one who opted to buy rather than rent, mine was a consumption decision rather than an investment decision. When I look at return on liquid portfolio over the past 18 months (period of time since we bought), parking capital in NYC coop has cost more than renting a bigger place would have cost during the same period. So many variables, but I don't expect that to change. Nevertheless, we opted to buy because for me it is not about the numbers, it is about making a "home." I can only imagine this tug for a "home" would be that much stronger if I had children. I cannot imagine that I am unique in this regard.

Me too. It was always fun to listen to his advice for which if you went deeper just one additional layer, would be silly or misleading.