Understanding the key metrics investors use to evaluate Los Angeles apartment building investments.
Cap Rate: The Income-Based Snapshot
Capitalization rate ("cap rate") is:
NOI ÷ Purchase Price
In LA today, many multifamily deals trade in roughly the 4.5–5.5% cap rate range, depending on location, condition, rent control, and risk.
Investors use cap rate to:
- Compare different properties on an income basis
- Gauge whether a building is priced aggressively or conservatively
- Evaluate how property income compares to other investments
GRM: Quick Rule-of-Thumb Valuation
Gross Rent Multiplier (GRM) is:
Price ÷ Gross Scheduled Income
For example, a building that collects $200,000/year in scheduled rent and sells for $3,400,000 is a 17.0 GRM. Investors often look at GRM to quickly compare deals in the same submarket.
Cash-on-Cash Return: What You Actually Take Home
Cash-on-cash focuses on the return on your actual cash invested, after financing:
(Annual Pre-Tax Cash Flow) ÷ (Total Cash Invested)
This metric is critical for leveraged investors because it reflects:
- Loan terms
- Debt service
- True out-of-pocket capital (down payment + closing + improvements)
How Investors Combine These Metrics in LA
Savvy buyers don't rely on just one metric. Typical underwriting includes:
- Target cap rate and GRM within the norms of the submarket
- Target cash-on-cash return that justifies the leverage and risk
- Stress tests for vacancy, rent growth, and interest rate changes
A building with a slightly lower cap rate may still be attractive if it offers strong appreciation potential or a path to higher cash-on-cash after improvements.
What This Means for Owners
If you're planning to sell, knowing how investors underwrite helps you:
- Understand feedback on pricing
- Prioritize improvements that actually impact value
- Present your rent roll and expenses in a way that builds buyer confidence
Request a valuation to see how your building stacks up.
Quick FAQs
Q: Is a higher cap rate always better?
A: Not necessarily. Higher cap rates can reflect higher risk, weaker locations, or significant deferred maintenance.
Q: How do interest rates affect cap rates?
A: When debt becomes more expensive, cap rates tend to rise as buyers demand a higher return to compensate.