27 Mar Why Invest in Santa Monica Apartment Buildings during a Market Correction
If you’re in a 1031 Exchange and need to buy or you want your money to work harder than you’re achieving in Bonds, CDs or your bank, you may want to consider apartment buildings in A+ coastal markets such as Santa Monica. In a downturn, you want your money and investment to be insulated as much as possible to preserve your capital and cash flow, in these circumstances, look for deals, either stabilized or value add opportunities in A+ markets that will withstand the blow of a market correction and appreciate more than you’ll find in B+ markets.
Below is a Cap Rate chart showing you value trends of Apartment Investment performance of 5-50 units since 2005 in West Hollywood and Santa Monica. If you need a quick reminder, Cap Rates equate to the rate of return you can expect to receive off of your investment. For example, you pay $1M for a building at a 3% cap and you’ll earn $30k/year net, after prop taxes and expenses are paid (not including your debt payment). Generally, the lower the cap rate, the less risk and better rental market the apartment building is located in. You go out to Corona you could expect a 6% cap for a less stable market, still a great market, though less insulated from economic volatility than a prime coastal submarket such as Santa Monica.
Looking at the chart below you’ll see a historic chart for Multifamily Cap Rates in West Hollywood (in Orange) and Santa Monica (in Blue), remember that for our purposes, the lower the percentage cap rate the better, meaning, lower cap = higher value and higher cap rate = lower value.
You can see 2oo6 being a peak in values where WeHo and Santa Monica are almost equal cap rates of 4.25%, though in 2009 values in WeHo sharply plunge to 5.5% and takes nearly 7 years to bounce back to it’s 2006 peak. Additionally, you can see so far for 2020, WeHo values are already retreating where Santa Monica is still hovering in the 2018 and 2019 3.5-4% cap range.
If you bought a $100k NOI WeHo building in 2006 for a 4.3% cap; you would have paid $2.3M. That same building in 2009 would have been worth $1.7M, a 35% drop and $600k loss of value. In the same scenario, would you have purchased a similar building in Santa Monica with a $100k NOI for a 4.2% cap; you would have paid $2.3M and by 2009 the value would have dropped only 5% or a value $2.19M, just a $110k difference in value.
Chart: Historic Multifamily Cap Rates for West Hollywood in Orange and Santa Monica in Blue