Bravo PY. I bought a Hollywood Hills condo in April 1998 which I sold in December 2006 for 391% of my purchase price. Since then condos in my old building have fallen 8%. Now a war story.
In 1996 I approached some of my tax clients to syndicate some Los Angeles (LA) area apartment buildings. Why did I think they were cheap? They were available at 12-14% cap rates. In 1996 financing them was difficult as every bank I approached demanded 30% down. So? If you buy a property with 30% down and pay 8% for the mortgage, with a 12% cap rate you make 21.3% on your money. How? .7 x .08 = .056; .12 - .056 = .064, .064 / .30 = .213. It looked good to me. This calculation excludes potential property appreciation. None of my clients would do it. They were scared. In 2002 some of them asked me, "What's good? Surely you know. What should I do now?" I told them, "I haven't a clue. Good opportunities usually look bad, but if I saw something really attractive, I would say so". Since 1996, LA area real estate cap rates have fallen and rents increased, such that the properties are triple their 1996 prices! Had we bought the properties in question, we would have realized a 33.4% internal rate of return for nine years, assuming we sold the properties at the end of 2005 for triple the initial purchase price. Not too shabby. But we didn't.