Thinking about a Marina del Rey investment but unsure whether to focus on cap rate or IRR? You are not alone. Westside deals often trade at premium prices, and the right metric can change what looks “good” on paper. In this guide, you will learn how cap rate and IRR differ, how local Westside dynamics affect both, and how to run simple scenarios before you write an offer. Let’s dive in.
Cap rate vs IRR: plain-English
Cap rate shows today’s unlevered yield. It is your Year 1 net operating income divided by the purchase price. It is great for quick comparisons of stabilized properties.
IRR is your time-weighted total return over a hold period. It accounts for timing, leverage, income growth, capital improvements, and the sale at exit.
Both matter. Cap rate is a snapshot of current yield. IRR is the movie that plays out over time.
Why Westside location changes the math
Limited supply and pricing
Marina del Rey has a constrained coastline, a mix of luxury condos, small multifamily, and waterfront units, and fewer large complexes. Limited inventory and strong lifestyle demand often mean lower cap rates on stabilized assets compared with inland submarkets. IRR in this context leans more on income growth and exit pricing.
Regulations you must model
- California’s Tenant Protection Act (AB 1482) limits many rent increases and sets just-cause standards, which reduces upside in rent projections for covered properties.
- Short-term rental rules, HOA covenants, and county land-use controls vary and can limit STR income. Marina del Rey sits in unincorporated Los Angeles County, which differs from the City of Los Angeles, so property-specific checks are essential.
- Proposition 13 caps annual assessed-value increases, but a purchase resets assessments to market value. That can change cash flow and exit assumptions.
- Coastal risk, including sea-level rise and flood exposure, can increase insurance and capital reserves. Higher forward expense growth pressures NOI and valuation.
Financing and operating costs
Debt costs, loan-to-value, and covenants can raise or lower your equity returns. In higher-rate environments, leverage can reduce IRR on cash-flow deals. Insurance costs for coastal properties have also trended up, which affects NOI and should be reflected in sensitivities.
A simple Marina del Rey example
Below is a simplified, hypothetical template. Replace the numbers with current comps, vendor quotes, and lender terms before you decide.
- Purchase price: $4,000,000
- Year 1 stabilized NOI: $240,000
- Initial cap rate: 6.0 percent (240,000 divided by 4,000,000)
- Hold period: 5 years
- Annual NOI growth: 2 to 3 percent
- Exit cap rate: 5.75 percent in the base case
- Selling costs: 4 to 6 percent
- Financing for leveraged cases: 65 percent LTV at market rate
How to build IRR:
- Project NOI for each year using your growth and expense assumptions.
- Estimate exit price by dividing the terminal year NOI by your exit cap rate, then subtract selling costs.
- For equity IRR, subtract outstanding loan balance at sale, add annual cash flow after debt service, and include net sale proceeds in the final year.
- Run IRR using a spreadsheet IRR function.
Key idea: IRR depends on your entry cap, exit cap, income growth, leverage, and timing. Small changes in exit cap or rent growth can move IRR a lot on a multimillion-dollar coastal asset.
Sensitivity: exit cap and hold period
The table below shows illustrative unlevered IRR outcomes for the example above. Your numbers will differ with real inputs.
| Exit Cap | 3-Year IRR | 5-Year IRR | 7-Year IRR |
|---|---|---|---|
| 5.0% | 7.8% | 8.4% | 8.7% |
| 5.75% | 6.2% | 6.9% | 7.3% |
| 6.5% | 4.8% | 5.7% | 6.2% |
What to notice:
- A 0.75 percent change in exit cap can swing IRR by more than 1 to 2 percentage points.
- Longer holds partially smooth exit timing, but exit cap still matters a lot.
Sensitivity: leverage and interest rates
Assuming the 5-year base case above, here is an illustrative equity IRR grid by LTV and fixed interest rate. These figures assume interest-only for simplicity in Y1–Y5, then payoff at sale. Use your actual amortization and lender quotes.
| LTV | 5.5% Rate | 6.5% Rate | 7.5% Rate |
|---|---|---|---|
| 55% | 7.6% | 7.1% | 6.5% |
| 65% | 9.1% | 8.4% | 7.4% |
| 75% | 10.8% | 9.6% | 8.1% |
What to notice:
- When debt cost is below unlevered yield growth, leverage lifts equity IRR.
- At higher rates, the benefit narrows and can flip if the spread turns negative.
When to use each metric
Use cap rate when you:
- Compare stabilized properties on current yield.
- Value income assets by applying market cap rates to NOI.
- Communicate quick, apples-to-apples snapshots across submarkets.
Use IRR when you:
- Evaluate value-add, renovation, or development where income changes over time.
- Compare different hold periods, capital structures, or exit strategies.
- Need a single return figure that incorporates timing, leverage, and sale proceeds.
Helpful complements:
- Cash-on-cash return shows annual cash yield on your equity under specific financing.
- Equity multiple shows total cash returned divided by equity invested.
- Sensitivity tables reveal how exit cap, rent growth, and rates move returns.
A Westside investor checklist
- Verify income assumptions. Distinguish in-place rents from pro forma and note lease expirations.
- Confirm AB 1482 applicability and any exemptions. Adjust rent growth accordingly.
- Check STR eligibility. Review HOA, county rules, and any required licensing.
- Model insurance and expenses with coastal risk in mind. Stress-test increases.
- Confirm property tax assumptions. Reset assessed value at purchase and model annual caps.
- Pull recent Marina del Rey comps. Focus on comparable property type and location.
- Get real lender quotes. Model multiple LTV and rate cases.
- Include realistic capital reserves and any coastal maintenance needs.
- Run IRR scenarios across exit caps and hold periods. Include selling costs.
- Engage local escrow, title, and tax advisors on transfer costs and exit taxes.
Common pitfalls to avoid
- Comparing cap rates across unlike assets, such as a condo versus a small multifamily.
- Using optimistic pro forma NOI without labeling assumptions or timing.
- Ignoring selling costs, time to stabilize, or rent control in projections.
- Assuming past appreciation will repeat. Stress-test exit cap and vacancy.
- Missing seawall, pile, or coastal maintenance that hits cash flow.
Next steps
If you want a custom, deal-specific IRR build with lender quotes and Marina del Rey comps, reach out for discreet guidance and off-market access. For a conversation tailored to your goals, contact Gina Martino and select Receive Exclusive Off‑Market Listings.
FAQs
What is the difference between cap rate and IRR for Marina del Rey investments?
- Cap rate is today’s unlevered yield from Year 1 NOI divided by price, while IRR is your total, time-weighted return that includes income growth, financing, and sale proceeds.
How do Westside market factors affect cap rate and IRR?
- Limited supply and coastal demand often compress cap rates, and IRR depends more on income growth, exit pricing, and operating costs like insurance.
How does AB 1482 rent control impact returns in Marina del Rey?
- It limits many rent increases and sets just-cause rules, which reduces upside in rent growth assumptions and should be reflected in conservative IRR scenarios.
How important is the exit cap rate assumption in IRR?
- Very important. Small changes to the exit cap can move IRR significantly, especially on high-value coastal assets, so always run sensitivity tables.
Should I model short-term rental income in Marina del Rey?
- Only after you verify county rules, HOA restrictions, and licensing. If allowed, test both STR and long-term models and compare risk and management effort.
What other metrics should I consider beyond cap rate and IRR?
- Use cash-on-cash return for annual equity yield and equity multiple for total cash returned. Include sensitivity to rent growth, vacancy, rates, and exit cap.
Where can I get current numbers for a Marina del Rey deal?
- Pull recent local comps through MLS or county records, review reputable brokerage research for cap-rate context, and obtain lender quotes for real financing terms.
