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.
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 is stable: 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.
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