How to Buy a Costa Mesa Triplex

There’s lots going on with investments these days, and I wanted to focus on the positive ways to purchase an investment property like a Costa Mesa triplex this week. My last post this week talked about how to buy a single family home and produce a good return on your investment, and my previous one talked about the great mix of reasons why it is the right time to buy as an investor. And as a warning if you are following my Costa Mesa real estate posts this week, this one got a bit long, because it is complex. I am going to stretch this post into another one, and possibly two.

 

Alright. Let’s get down to it. Buying a triplex is different. Especially from purchasing a single family home. Often you don’t get to “kick” the tires, go inside to see what it looks like previous to making an offer. Most times you will just do a drive by, get a feel for the neighborhood, and do the math. It is a very unemotional process when you are looking at buying a Costa Mesa triplex. It really becomes a numbers game – do the units produce enough rent to cover costs? How much maintenance is required? What is the current condition of the building? What will a mortgage be? Should I just buy with all cash?

 

Most good investors live by PITI – what does it cost to hold the property each month. What is the cost of Principle, Interest, Taxes, and Insurance? If your mortgage on a triplex is $3,000/month, your homeowners insurance is $400/month, and your taxes are $400/month, you have a total PITI of $3800. Therefore, you will need at least $3801 to have positive cash flow so the investment pays for itself. Most investors will want much more than that in that same scenario, closer to clearing at least $4500 total per month because there will always be the occasional need for repairs.

 

Many investors live by the rule that they want a 6% capitalized rate. Let’s look at how you would go about analyzing an investment by it’s cap rate.

 

A couple of questions for Costa Mesa triplex investors to be:

 

• How do you know what a commercial income property is worth?
• How do you know that you can get your desired return on your investment?
• Is there a way to calculate the maximum you can pay for an investment and still achieve your investment goals?

 

Many real estate investors determine the value of an income property by using the capitalization rate, aka cap rate. However, it is probably the one most misused concept in real estate investing.

 

While brokers, sellers, and lenders are fond of quoting deals based on the cap rate, the way it is typically used, they really shortcut the true use of a valuable tool. A broker prices a property by taking the Net Operating Income (NOI), dividing it by the sales price, and voila!–there’s the cap rate.

 

Say the property has an NOI of $55,000, and the asking price is $565,000.

 

$55,000/ $565,000 = 10.27% cap rate

 

But what does that number tell you? Does it tell you what your return will be if you use financing to purchase a Costa Mesa real estate triplex? No. Does it take into account the different finance terms available to different investors? No. Then just what does it show?

 

What the cap rate above represents is merely the projected return for one year as if the property were bought with all cash. Not many of us buy property for all cash, so we have to break the deal down, usually by trial and error, to find the cash on cash return on our actual investment using leverage (debt/mortgages).

 

Then we calculate the debt service, subtract it from the NOI, and calculate our return. If the debt terms, loan-to-value, or our return requirement change, then the whole calculation must be performed again. That’s not exactly an efficient use of time or knowledge.

 

Brokers are fond of quoting a “market cap rate.” This is an effort to legitimize an assumption, but it is flawed in its source. As a comparison tool it is almost impossible by any means to find out what other properties have sold for on the basis of the cap rate.

 

In order to correctly calculate a cap rate, and get an apples to apples comparison, you must know the correct income and expenses for the property, and that the calculations of each were done in the same way explained below.

 

The real question is not how much I (or another investor, or even an appraiser) value a Costa Mesa real estate triplex at, nor is it the value from a cap rate estimated in the market. It’s the value at which YOU can attain YOUR investment goals, that is reflective of YOUR borrowing power, and gives you an intelligent starting point for the analysis.

 

I warned you this was getting long – I’m going to continue babbling, er, talking 🙂 about this in my next post. To do this right, there is a lot more information that needs to be covered, especially with financing a Costa Mesa triplex.

 

In the meantime, here is a post I wrote a little bit ago with a real example of an investment in a Costa Mesa triplex, and below are a few available investment properties in Costa Mesa real estate right now – if I can help you find or sell a property, please call me at (714) 743-9882 or E-mail me here to reach me.