GRM vs. CAP?

I’ve gotten this question from beginner investors lately, and it’s worth a quick explanation. What is GRM and CAP and which is better to use?

GRM stands for Gross Rent Multiple and you get it by dividing the gross rent (the annual total rent from all units in your building) into the purchase price (PP/GR). So a $1M purchase price and $100,000/year in gross rent equates to a 10 GRM. The higher the GRM, the less you cash flow, all else being equal.

CAP is your capitalization rate, which is your net income (gross rent minus all expenses) divided by your purchase price (NI/PP). In this scenario, the higher the number, the more you cash flow.

The benefit of CAP is that it provides more information–that is, if the information is accurate. On larger properties of 8 or more units, you’re more likely to get more accurate information because a management company or a more sophisticated investor has better accounting. However, on smaller buildings of 3-4 units I prefer to use GRM because landlords are generally terrible at keeping and reporting expenses (and they’re fairly easy to estimate), so the only real number is the GRM.

In conclusion, GRM is a great shorthand but doesn’t tell the whole story, and CAP will give you an exact idea of income if you are able to calculate it correctly.

In today’s market in LA, a 4 CAP and 18 GRM are pretty common, but I tend only to show my clients better than 5 CAP or 15 GRM, depending on various factors of course. Email me if you have any questions.

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OFF MARKET 4plex – but not for long!

If you have $500,000 cash to invest and you want to make $2,000 cash per month after all expenses (5% cash return, 10% equity+cash return), I have an upcoming fourplex that you may be able to snag if you act fast. Please let me know immediately at davidlbrundige [at] gmail [dot] com.

Here’s the (potential) upcoming MLS description:

Beautiful four-cottage compound property on a gated, half-acre lot in the desirable hills of Glassell Park. This turnkey investment property is unlike anything you’ve seen in Los Angeles with three parking spots per cottage, private yards, shared gardens…the gem of the neighborhood. Each home has 2 bedrooms and 1 bath with original wood floors, character kitchens, and close to 1,000SF each! Three units are already rented successfully at market rent. The owner’s unit, with two garages and covered work area (it’s crazy how much space there is), is delivered vacant. Well-maintained by owner on property, with mostly copper plumbing and improvements such as new HVAC, water heaters, electric, landscaping, gate system, appliances, and more. Cash flow immediately with a still low 30-year fixed interest rate and watch the neighborhood (and all of the roses) continue to blossom.

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Making an Offer & What that Means

Many buyers think that making an offer means you’ve bought a property. In fact, buyers are heavily protected through many steps of the process before you’ve actually exchanged money for title. For nervous buyers, this can help. Let me explain the steps:

  1. Negotiations: You likely won’t get your offer accepted in a seller’s market. When you’re reaching for a good deal, it’s likely that the seller, in a seller’s market, will come back with new terms. When the seller makes a counter offer, your offer is immediately void until you accept or offer new terms.
  2. Earnest Money Deposit (Days 1-3): Once your offer is accepted, you have three days to send in your earnest money deposit (EMD – usually 3% of the purchase price). Before the EMD is sent, it’s very easy to cancel if you have to. At this point, the seller likely hasn’t changed the property status on the MLS, so they will still solicit other offers. Once you send in the EMD, you settle into the escrow/investigation process.
  3. Physical Contingency (Days 1-17): Depending on negotiations, you have up to 17 days (in some cases) to investigate the physical state of the property. During this time, you can cancel if you don’t like anything about the property, and receive your EMD back. (Out of the 50 or so escrows I’ve brokered, only one company charged a $200 cancelation fee. That is not normal.) During this period, the seller delivers disclosures about the property and we receive the preliminary title report.
  4. Loan Contingency (Days 1-21): Depending on negotiations, you have up to 21 days (in some cases) to get approval on your loan. Given the massive amount of loans being processed in Southern California, this process usually takes 21 days or longer unless you have worked with a direct lender to get approved already. Often, the best we do is get a confident nod from the loan officer to go ahead and remove the loan contingency.
  5. Appraisal Contingency (Days 1-21): Depending on negotiations, you have up to 21 days (in some cases) to get an appraisal on the property for the price that you offered. If the appraisal comes up short, you can invoke the appraisal to cancel the deal.
  6. Removing Contingencies (Day 21): Once you’ve removed all of your contingencies, your EMD is promised to the seller. That said, if you can prove negligence on the seller’s part, an arbitrator may not grant the seller your EMD. During this time, you work with your loan officer for final approval. You still have not paid your down payment, and that is still protected, in most cases.
  7. Funding (Day 30): Once your loan is approved, you sign loan docs, and you transfer your down payment, you can still shout STOP and the escrow company cannot move forward with the deal. If the other party doesn’t agree to cancel and refund your money, you will likely go to arbitration to settle claims.

In conclusion, it is preferred to be confident in your offer. But if you’re nervous as a buyer, rest assured that signing your first offer doesn’t necessarily mean you’ve made your most important real estate decision. Usually, that comes when you remove contingencies.

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“Bullish on Drones”

Los Angeles Magazine wrote a piece on drones which features Yours Truly. The funny thing is, you’d be surprised how many listing agents won’t shell out for drone footage. Of course, all of my listings get drone videos for free, if requested.  Here is the paragraph in the article about real estate:

Comparatively inexpensive aerial footage is also changing the way real estate agents market properties, whether palatial estates in Beverly Hills, starter homes in Echo Park, or condos in downtown L.A. “It’s not like every buyer needs a drone video, but you don’t want to alienate anybody because they feel you weren’t selling them hard enough,” says Coldwell Banker realtor David Brundige. He’s so bullish on drones that he formed a company last year, DroneMyListing.com, with a former airline pilot.

Of course he didn’t quote the part of my interview where I describe the value of videos in marketing a property. The truth is, certain properties are served better from drone footage than others, depending on what that drone footage reveals. I’ve even used a drone to scout the roof of a property for a buyer. That could reveal good things or bad things. When you market a property, it’s always about what you want to highlight. Drones provide a special angle, and one that can pay off if used correctly.

Here’s the article. Here’s a video for my listing that sold for $130,000 over what top agents at my brokerage considered an ambitious listing price:

 

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Checkers vs Chess in Real Estate

While my record as a listing agent is second to none with a 107% average sale above listing price, I spend 80% of my time as a buyer’s agent. Why? Because a) we’re in a seller’s market, b) buyers tend to be younger than sellers so that c) buyers search the Internet for good information and find my blog. Therefore, you can bet I’ve talked to enough first- and second-time investors to understand the weight that this decision has on their livelihoods, futures, and all the work they’ve put into getting where they are now: at the cusp of climbing America’s class structure.

That’s why I take it so personally when a listing agent or her seller messes around in order to earn an extra $5,000 or 0.5% on their purchase price. For the seller, it’s an extra $5k. For my buyer, an entire life’s savings or inheritance is at risk. My job as an agent both on the listing and buyer’s side always involves considering my client’s larger financial picture and advising according to life plans. You can’t discuss a real estate decision without thinking about a client’s daily life and goals. It’s not a stock or bond; it’s a living, physical, very expensive investment that takes care and attention, and affects tenants’ lives directly.

So why the rant? I’ve been an agent for multifamily and single family residential real estate for four years now. Speaking honestly, there aren’t many Princeton graduates who become realtors – if I skipped college altogether I could make as much money as I do now. Real estate came into my life because of the larger picture: retiring early from my real estate investments. Most residential realtors aren’t business-minded in that way and understand that a lot of pounding pavement and making neighborhood connections and self-marketing could earn them a six-figure salary. I’m not that kind of realtor, and I never intended to be. So when a long-time realtor invokes her 20 years of experience and justifies her backhanded and illegal move by claiming “her client’s interests,” I bite my tongue while in the background I call the guild lawyer and prepare for every chess move. (I can beat you at chess. Especially if that chess game involves nuances of Southern California’s standard purchase contract.) You may have been in practice for the past twenty years but the contract has changed 10 times in the last four.

The thing is, while I never worry when it comes to my client’s legal and leveraged position since I set them up right, for a buyer, any sign of less than reputable action by the seller’s side can set nerves aflame. Buyers have enough to worry about from the property condition to title to their loan. It’s an emotional time for most buyers, and it’s easy to forget that real estate is one of the oldest businesses whose barrier to entry involves no morals nor reputation nor license. While an agent requires a license, if she is acting on her “client’s interest” she could attempt anything and justify it as such. 

When I’m selling a property, the reputation of the agent is one of the biggest qualifiers for an offer. When I’m buying, the due diligence period and the property must speak for itself. Though an agent’s checkers tactics don’t work in a game of chess, I’d rather not play games at all and work together in order to give our clients the best possible transaction experience.

On that note, I’d like to name several agents and colleagues with whom I’ve worked who have been stellar partners in this endeavor, while truly representing their clients’ best interests (in chronological order): Carlos Skubacz, Donna Rue, Francesca Zummo, Yolanda Gomez, Gavin Fleminger, Bill Rojas, Diane Herlofsky, Venus Martinez, and others. 

In multifamily real estate, a good deal for a buyer usually comes in differences of $100,000 and a secure investment. For sellers, they celebrate if they get $5,000 more than the market suggested. I contest that, in my experience, you can have it all: a wonderful transaction where both sides win. 

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Election Results, Real Estate-wise

Despite one’s personal political beliefs, a sharp turn in government is going to mean changes in the economy. You’ve already seen markets fall based on anxiety, so what does this mean in terms of real estate?

So far, since the election, more fair-priced apartment buildings have come on the market than I’ve seen since the beginning of the year. Could this be coincidence? On one hand, it would be hard for a reactionary seller to get a realtor to throw a property on the market in less than a week. However, that’s not to say they didn’t have a plan going into the election. Why would a seller want to sell now? Perhaps it’s the instability, fear, or they decide this its an apt time to move?

With a real estate mogul as president, one can assume that he might take care of his assets, tax-code-wise. Additionally, in a time of market volatility, having multifamily rental units is the most secure way to own real estate. House prices often surge and fall with the markets, but multifamily less so. When people foreclose their houses, they rent. This is the reality, for what it’s worth, from where I can see it.

 

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