Why are cap rates so low for San Diego multifamily? Good investment or speculation?

What is the incentive for a new investor to come along and pick something up at a 4.5 cap? Are they just holding their breath in the hopes that the caps stay low and they get some appreciation?
In Buying Property - Asked by Joe V. - Mar 31, 2009
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Answer(s)

Daniel H.
Broker/Agent
Surprise, AZ

Prices are high and rents can only go so high-so cap rate is lower in high priced area. And yes-I believe people buying in those areas are looking for apprecitaion-not cash flow.

Mar 31, 2009
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Tom N.
Broker/Agent
Irvine, CA

cap rates are low in southern california in general. But dont be fooled by the 4.5 cap rates. Not in this market. Most of the deals that actually trade do not trade at those cap rates. Also, listed properties are usually the ones that dont sell. Let me know if you need to discuss.
Tom Nguyen, Esq.
Executive VP
NAI Capital
tnguyen@naicapital.com

Apr 1, 2009
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Paul S.
Broker/Agent
Glendora, CA

Keep in mind a low cap rate means a high price. Cap is the relationship of the cash flow to the price. If the cash flow is low, relative to the price, the cap is low. As a result if you start at a 4.5% cap, the rents stay the same and the value goes up, the cap will go down. If you buy at 4.5% cap it means you may have to wait a very long time for the property to be worth more unless you can raise the rent. California real estate has for a long time had low caps (high price, low income). People invested in such properties because there was a (false) notion that California property would always go up. Investors were therefore betting on future value rather than income flow. San Diego was one of the first places to see price drops (caps going up) in Southern California. I would suggest you would be paying way too much for a property with a 4.5% cap? I have property listed that carry an 8 cap with tenant paying all expenses including taxes, insurance and maintenance. They have automatic rent increases in the future. Keep in mind cap is only a measure for 1 year. It does NOT include debt. A property with a 4.5% cap will not break even with 30% down. A property with an 8% cap will have a positive cash flow with 20% down. A better method for determining what has value and what does not is internal rate of return (IRR). IRR takes into account multiple years of cash flow, all expenses and debt service (remember cap is 1 year and no debt service and the lower the cap the higher the price). Cap is very easy to figure (probably why it is used so much) while IRR is much more difficult. In addition to IRR one should look at capital accumulation (CA). Simply stated capital accumulation is the amount money that is accumulated during a holding period? IRR is a percentage CA is cash. If you would like more information or an comparison example please send me an emal at paulsylvester@remax.net or call me a 626 485-5163. If you email me be sure and put something in the subject line so I don't think it is spam.

Apr 1, 2009
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Tai L.
Broker/Agent
San Diego, CA

I live in San Diego...North County Coastal area. If value of the property increases, the cap rate will decrease, vice versa. They move in opposite direction.
I say good investment. Pretty stable.

May 22, 2009
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