Apartment buildings in Southern California selling at 2 Caps - is this a bubble?

Just trying to wrap my head around this. A friend of mine is an apartment broker and says most of his listings are selling
in the 2-3 cap range for apartment buildings. He gets multiple offers, all cash and these are parks that are in areas you would be scared to go to at night. How is this not a bubble and whats the overall ramifications of it all? Im sure in other parts of the country its not this bad but it might be in their own right. What happens when rates tick back up? How does this play in the mobile home park world?

I think most of your questions apply to all asset classes in California, as well as most of the country. The state definitely has higher swings in appreciation during good times and devaluation during bad times, but it has been consistently cyclical just like the stock market.

People are buying crap properties at 2-3 cap because of this sole quick appreciation factor. People will hold a $1MM property for a year and then turn around and sell it for $1.25MM and have a nice gain. At that type of cap rate I bet they’re barely covering debt service depending on LTV.

General economic principles hold true when rates rise, debt service costs more, fewer people will qualify for those loans, meaning that difference will need to be priced into a property (to a degree) for it to be attractive - meaning it will sell for a higher cap rate.

Buying at these cap rates is speculation unless you have a very very extended time horizon and why most investors wanting long term cash flow buy outside the state. There are better deals with fewer swings to be had elsewhere.

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Agree with @jhutson. Speculation is speculation – some people wish to make money this way, some are able. Economic theory says that you will tend to get higher returns with riskier investments. Or lower returns with less risky investments.

What’s great about MHP is the perceived risk is so much greater than the actual economic risk – it’s an industry that has a disproportionate return for the level of economic risk – provided you know what you’re doing and don’t pay too much at the beginning.

Said another way, when you get into MHP thinking that empty lots are “worth something” or “upside” is worth paying extra for, that is speculation. It may be right or it may not be, but it’s based on an uncertain future. Pricing based on cash flow (cap rate) is supposed to be based on “today.”


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The cash is coming from overseas where the funds must be invested in SOMETHING. Or the money will be lost forever if it stays where it is.

That’s French for Chinese investors.

The brokerage industry is savvy in marketing large properties using slick brochures and lots of pro-formas. The buyers don’t know who else to look to.

In the land of the blind, the one-eyed man is king.

Don’t forget the crowdfunding folks. Many of those investors have no clue, they just trust their advisors/salespeople.

These 2% cap buyers are just stockpiling our future investments when they go bust.

I agree with Brandon@Sandell
Its speculation, pure and simple.

Mike Weiss

California = Speculation. Don’t even pay attention to what those yahoos are doing.

I think we are in for another recession soon. Not because I’m doom and gloom, but because a recession that happens every 8-12 years is somewhat predictable. In any event, if you are buying property right now, steal it. If you can’t steal it, then in a few short years you’ll be glad you are liquid. Recessions are predictable and we are nearing one so steal your purchases now or wait a little bit and be liquid when everyone else is in contraction mode. Just to time stamp my call, I’m calling the next one the “debt bubble.”

I broker apartments so here is my take… The price of an apartment is a function of 2 things: income and price per unit of comparable sales. The strike price of an apartment usually strikes somewhere between the two. So while there might be a market cap rate in the area which is dictated by the behavior of investor risk/return, there also is a market value for property based on its vintage and location that has value even if under or nonperforming. I’ve sold mismanaged deals on a really low cap rate that didn’t make sense but that’s because the buyer was buying at also a really low price per unit compared to the market trades so there was nowhere to go but up. Cap rate doesn’t tell the whole story. Now in CA, it’s possible that 2-3 caps is just the market cap rate right now for fully performing properties which doesn’t surprise me. This tells me buyers are forecasting extraordinary annual rental growth which drives down the cap rates. Why? Because historically in this cycle that is what has been happening and in the event of a downturn you have a lot of insulation in CA because of the housing demand there so you’re paying a lower cap rate for that protection - traditional risk versus reward. My opinion is we are eclipsing the top of the cycle and cap rates really can’t drop any further. NOI of apartments will continue to grow albeit not at the same historical pace of the last 5 years. So the prices will begin to plateau and then grow much slower. The biggest x-factors for future pricing at this point in the cycle (which affects all real estate but particularly apartments) are job growth, wage growth, and how much will someone allow the amount of their gross income go towards housing expenses.