Random thoughts allows for random pictures. Well, maybe not totally random. I was kinda hungry when I wrote this.
BawldGuy Axiom: The most difficult question for which to find an answer is the one you didn’t know to ask. Answers to those questions are often the most expensive.
Worrying about what the seller may or may not have paid for the property is wasted time. If your research shows empirically it’s worth $XX, then that’s what it’s worth. If they paid half that last Tuesday, so what? Is the seller, when you remind him what he paid, gonna reply, “You have a point, Grasshopper. I shall let you decide how much profit is fair. Please proceed.” Really?
Sellers generally follow the idea that the more they get the buyer to pay, the better off they are. This is almost a spiritual thing for them.
Said this over and over here, but it bears repeating. If yer chasin’ high cap rates that’s fine, in and of itself. Obviously, the higher the ‘cap’ the better the return. Well, maybe you shouldn’t be so quick on the trigger there, Roy. With rare exception, and I mean rare as in, a vegan ordering a #4 at Carl’s Jr.’s, really high cap rates are found in ah, shall we say, less than prime ocean front locations. Once all is factored into the real life equation, yer cap rate turns out to be a mirage. And for the record? That’s maybe why the guy was sellin’ in the first place.
Cap rates aren’t always what they seem. Never ever believe them, unless you or your guy is doing the numbers. No exceptions to this rule.
Newbies often will measure an income property by what’s known as the ‘times gross’ method. Actually, GRM, or gross rent multiplier. Simply put, you take the GSI (gross schedule income — always annual) and divide it into the value. If the seller is asking $100 and the GSI is $10 your ‘gross multiplier’ is 10. If you have eight comps showing an average multiplier of 11, 10 looks good. But wait, as you surely suspected, there could be a slight hitch. This method is probably the most unreliable method of appraising value for the amateur.
The trap. If ‘A’ has the same income as ‘B’ but 20% more operating expenses, that means ‘B’ is a better value, ‘cuz the cap rate for ‘B’ is higher, due to the higher net operating income — NOI. Real world example you ask? Sure. One fourplex has separate water heaters for each unit, resulting in tenants paying for their own hot water. The comp fourplex has one water heater which heats all four tenants’ water — paid for by the generous landlord. Uh, that’d be you.
Gross rent multiplier is a rule of thumb at best. The pro knows the underlying assumptions which must be in place, so they’re generally comparing apples to apples. GRM tends to hide comparative NOI’s.
Paying for an inspection as part of the buying process? Good — as far as it goes. We’ve vetted inspectors in several cities. They’re not experts in everything, and it would be unfair to set the bar that high. If they (or you) suspect a roofing problem, don’t rely on their report. Call in a roofing contractor. Same with plumbing, foundation, electrical — everything. Start with the inspector but rely on the specialists. It’s cheaper in the long run. Especially with foundations. More times than not, the problems have been less severe than all parties thought.
Always opt for the specialist when getting serious with an inspection repair. This one practice will help you avoid more heartache than you’ll ever know. I learned this one the hard way.
Hope this helped. Sometimes a few random pieces of experience can go a long way. Hey, I have an idea. You can call me or shoot me an email, and we can talk about all the experience I didn’t post about tonight. Grab the Contact BawldGuy thingamajig and give it a healthy click.
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And you forgot the important one. Always have an experienced hand on your investment team!
You had me at cheesecake.
That’s always my first question. “If the cap rate is so high why are they selling?”
Josh — Does that look good, or what?! The genius (no kiddin’) who runs this blog’s geek side, is also a wicked good photographer. He let’s me pilfer his stuff all the time. Both of these pics are his. He’s got a sunset shot that’s new. Can’t wait to use it.
Robert — Ah, yeah.
*in the voice of blog geek*
“Jeff, I was just reviewing your hit levels on your blog and it seems to have skyrocketed on 17th of July.. I think you should use more cheesecakes in your posts to increase readership levels. You can never go wrong with cheesecake no matter how low the market goes.”
And here I thought it was my smooth prose.
The more I ponder, the more I tend to side with your theory.
@Jeff: Thanks for, how did you put it? Pilfering some of my photo work. It looks really good on your site and it’s also nice to see that your readers enjoy dessert… mmmm cheesecake… as much as I do.
I know there’s a special skill to what you do with a camera. I just don’t have it, not by any stretch of the imagination. Thanks again.
Ha! But what I can do with a camera you blow me away with your Purposeful Planning with Real Estate. How’s that for a keyword rich comment