Cap rate vs GRM: which should I use to price an LA apartment building?
Use both, for different jobs. GRM (price ÷ annual gross scheduled income) is the fast filter. It ignores expenses, so it is only good for comparing similar buildings in the same submarket. Cap rate (net operating income ÷ price) is the real pricing metric because it accounts for operating costs, but only if the expense number is honest. In LA multifamily, always compute cap rate twice, on in-place income and on market-rent pro forma, because the spread between the two is what a value-add buyer pays for.
Answered by Shaya Lowenstein, a Los Angeles multifamily broker at Lyon Stahl Investment Real Estate, CA DRE 01942326, with 15 years in apartment buildings and land across Los Angeles County. His closed sales are published with addresses and recording dates, so anything claimed here can be checked against the county record.
Where each one lies to you.
GRM hides expense differences. Two 12-unit buildings at the same GRM can have wildly different NOIs if one has master-metered utilities, high insurance, or deferred maintenance. Cap rate hides income games: brokers quote "pro forma cap" on rents no tenant is paying, or calculate NOI with 3% management on a building that needs 6% plus payroll. When you see a cap rate, ask: whose expenses, and whose rents?
What LA actually trades at.
Ranges move with rates and submarket, but the structure holds. Tighter submarkets (Koreatown, Mid-Wilshire core) trade at lower caps and higher GRMs than South LA or secondary corridors; heavy rent upside compresses the in-place cap because buyers pay for the future. I publish current averages by submarket on my market data pages, computed from closed sales, not asking prices.
EDUCATIONAL ONLY, NOT LEGAL OR TAX ADVICE. RATES, THRESHOLDS AND ORDINANCES CHANGE, AND SEVERAL OF THE FIGURES HERE DEPEND ON FACTS SPECIFIC TO YOU. CONFIRM ANYTHING YOU PLAN TO ACT ON WITH YOUR OWN ATTORNEY OR CPA, OR WITH THE AGENCY THAT SETS IT.
What expenses go into NOI?
Taxes (at the new buyer's basis, not the seller's), insurance, utilities, management, repairs/maintenance, and reserves, but not mortgage payments, depreciation, or capital improvements.
Why do brokers quote pro forma cap rates?
Because upside is real value, but it has to be priced as a plan (turnover timeline, renovation cost, regulation), not as if it already exists. Demand both numbers.
SHAYA LOWENSTEIN · LYON STAHL INVESTMENT REAL ESTATE · DRE #01942326 · (323) 944-2221