Updated August 16, 2026
They price two things at once: the income the building produces today, and the rate at which they believe they can close the gap to market rents over their hold period. On a pre-1978 LA building where in-place rents sit 30% to 50% below market, virtually none of the buyer's return comes from the current rent roll — it comes from turnover. So the questions that actually drive their number are how fast units turn, what each turn costs to renovate, what the unit re-rents for, and what the ordinance allows in between. Understanding that is how a seller stops arguing about cap rates and starts arguing about the inputs that actually move the price.
In-place NOI, verified. Collected rent, not billed rent, from the trailing twelve months. Real operating expenses including current insurance, current property tax under the new assessed value after the sale, management, and reserves.
Annual turnover assumption. Typically a percentage of units per year based on the building's actual history. This is the single most important input in the entire model.
Renovation cost per turned unit. What it costs to bring a unit to a condition that achieves market rent.
Achievable market rent per unit type. Grounded in real comparable rents in that specific submarket, not citywide averages.
The allowable increase on units that do not turn. For LA City RSO the current published rate is 3% for the year running July 1, 2026 through June 30, 2027, under the rewritten formula of 90% of CPI with a 1% floor and 4% ceiling.
An exit assumption. What the building is worth at sale after several years of partial rent normalization.
Sellers instinctively argue about the cap rate. Buyers are rarely moved by that, because the cap rate is an output of their model rather than an input. The arguments that work are about the inputs.
Turnover history. If your building has turned four units a year for five years, that is evidence, and it beats a buyer's conservative default assumption. Document it.
Actual achieved rents on recent turns. If you turned three units last year and they leased at $2,450, that is not a projection, it is a fact — and it establishes the market rent input directly.
Renovation cost. If your recent turns cost $18,000 rather than the $35,000 the buyer assumed, invoices settle it.
Expense accuracy. Buyers load expenses conservatively when the seller's statements are unclear. Clean, itemized statements narrow the range in your favor.
Every one of those is a document you either have or do not. Sellers who assemble them shift the model. Sellers who argue about cap rates do not.
The RSO rewrite that took effect July 1, 2026 replaced the old formula of 100% of CPI with a 3% floor and 8% ceiling with 90% of CPI, a 1% floor, and a 4% ceiling. The published rate for the current RSO year came in at 3% — the same as the prior year, which was less dramatic than many buyers had priced in during the first half of 2026.
The distinction that matters in a negotiation: the year-one number is a fact you can point to, but a buyer holding for five or ten years is underwriting the ceiling, not this year's rate. The lower ceiling permanently reduces how fast non-turning units can catch up. Sellers get the better of the near-term argument; buyers get the better of the long-hold argument. Knowing which one you are having is worth more than winning either.
It is real, and it is mostly informational. The buyer is modeling upside they cannot see from outside. You can see it. Every piece of evidence you supply about turnover, achieved rents, and renovation cost replaces a conservative assumption with a fact — and each of those substitutions moves the price in the same direction.
The corollary: a seller who cannot document any of it gets underwritten conservatively across the board, and the resulting offer is not the buyer being difficult. It is the buyer pricing uncertainty.
Before you go to market, assemble the four documents that drive the model: a multi-year turnover history, the achieved rents on every recent turn, the invoices for what those turns cost, and clean itemized operating statements. Then have the conversation about inputs rather than cap rates. On a rent-stabilized LA building, the difference between a documented upside story and an undocumented one is routinely larger than anything else a seller can influence.
Why do buyers use a lower cap rate on rent-controlled buildings?
Because they are paying for future rent growth from turnover, not just current income. A large gap between in-place and market rents supports a lower going-in cap rate, since the buyer expects income to rise materially over the hold.
Does a building with high turnover sell for more?
Generally yes, because turnover is how the upside gets realized. A building with a demonstrated history of units turning regularly is worth more than an identical building where nobody has moved in twenty years — same rent roll, very different path to market rents.
Should I show buyers my market rent estimates?
Show real evidence — the rents your recently turned units actually achieved and genuine comparable rents in the submarket. Presenting speculative market rents as if they were in-place income damages credibility on every other number in your package.
Michael Sterman is Senior Managing Director Investments at Marcus & Millichap.
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