What's up everybody? Welcome back to this week's segment of the no limit. I'm excited to be here with you yet again talking about something that I've had hundreds and hundreds of different people ask me across the years of just being in the business and closing to even before I closed deals people were asking about this and I'm like, I don't know I haven't even done that before.

But as cap rates everyone has questions about cap rates whether it's indirectly or directly whether they're directly asking you specifically about cap rates or they're asking about interest rates cap rates and interest rates usually trend together typically what you see is the interest rate will move first whether that be up or down and then cap rates steadily follow those valuations follow along side with where we're going.

The interest rates are trending although it's a little bit of a larger rule of thumb because it isn't always the case and sometimes you'll see it happen a little bit differently you'll see it fluctuate a little depending on the actual specific market that you're in so looking at it from a macro level that's the rule of thumb looking at it from a micro market specific level.

Things are going to change a little bit so the big question I get all the time about cap rates you know is like should you buy a deal with a really low cap like should I buy a 2% cap deal or 3% or 4% or whatever and especially when competition was absolutely ridiculous and cap rates were extremely low it's like how are people actually making deals make financial sense.

And some people get so caught up with the cap rate they say well i'm never going to buy a deal if it's lesser than a 6 cap or 7 cap and good for that person for feeling like they know what they're talking about in terms of not buying a deal for lesser than that percentage of cap rate but I feel like what they should more so be saying is i'm maybe not going to acquire an asset.

That doesn't have the financial capacity to perform at xyz amount or what have you depending on whatever the business plan or the strategy is.

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Artificial in my opinion now it depends on the asset it depends on the time of the market it depends on the location is a lot of things that it's going to depend on but let me use a potential example investment to maybe try to get my point across and make this make just a little bit more sense so we recently close an acquisition back in November of last year 2022.

And we bought it at a I believe it was a 5.2 cap so when you initially see 5.2 you think that's kind of low.

Do you and it was an a class properties like okay you're buying a class you're buying it at 5.2 most people don't like to buy a class at least most sponsors or syndicators or value add investors because there's no real true way to force any kind of appreciation and extract a lot of additional value out of an asset you're really buying.

Much more of a stabilized property now this particular asset was a little bit different because when we bought it to even though we bought it a 5.2 cap technically if we actually ran the numbers and look down all the financials it was 5.2%.

But it was artificially low because really what we were buying was a loss to lease deal so whereas the actual rents currently collected as of today the total NOI as of today connect that with the purchase price that we had sure it's a 5.2 but there is literally zero caps that I have to do to the deal maybe some slight deferred maintenance but it's a class a property built in 2013 there's no actual legitimate.

CapEx that was required for us to do in at least the near term like next 3 to 5 years there wasn't anything major that was going to be required however over the course of that 3 to 5 year timeframe there was an ability to take a rents where they were at today right when we acquired the asset to over $500 a month higher that was the delta of loss to lease between where we were today versus where we could go.

Now you may be thinking how on earth is a class a asset have that much of a delta well it's because it was a very unique deal and we got it directly off market actually did go through a broker but we were the only set of eyes that ever got to take a look at it and we got it under contract immediately because we could see the writing on the wall we could see the potential of the asset.

So this loss to lease play this $500 a month delta even though we bought it a 5.2 cap and everyone's like oh it's so low why would you buy well because the loss to lease and the $500 delta with no work required really just being a management play the value add just tremendous I mean extra 500 let's do the math for quick and pull out my phone those either don't know I cannot do math in my head so when pull out the old handy dandy calculator let's say we get an extra $500 a month let's say we get that.

Over the course of the entire property you know in the next three five years there's 118 units multiply that time to 118 that's an extra $59,000 a month in income so then we're going to analyze that because that's what you look at in terms of cap rates so then we multiply that times 12 so extra $708,000 of revenue that we can potentially generate for this one particular property with zero cap X zero financial.

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