Moses Kagan on Real Estate

The state of the West Hollywood apartment market

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Today I spoke with a broker who has an eight unit property in West Hollywood listed at a somewhat reasonable $187,500 / door.

I say somewhat reasonable because the gross rent multiple is 15x. At a list price of $1.5MM, that means the property is generating rents of $100,000 / year. The rents are obviously very low, averaging just a bit over $1,000 / unit / month.

Those tenants are never, ever leaving, because they’re paying 50% of market for their units. And West Hollywood’s rent control law is, if anything, stricter than LA’s, so there’s no way you’re forcing them out.

If we assume, as I usually do, that the net operating margin to the new owner will be approximately 65% of the rent roll, then the property will generate something like $65k in NOI. (That’s very generous, by the way – when you get up to 15x, the property tax the new owner pays is so disproportionately high that the margin shrinks considerably.)

Recall that you can calculate the cap rate (un-levered yield) on a property by dividing the NOI by the purchase price. Even using the generous 65% NOI margin estimate, that means the cap rate on this property is $65,000 / $1,500,000 = 4.3%.

With a return like that, you have to ask: Who would want to bother with being a landlord for this building?

Guess how many offers they have, a week after going on the market…. five.


Written by mjkagan

07/27/2012 at 4:15 am

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