8% Cap Rate to 23% Cap Rate in 30 Days - Miami, Florida

22 Replies

Just thought I'd share a big win to inspire other investors:

I recently purchased a 3 unit triplex in Hialeah, Florida for $270,000. It was below market value for that area and I bought it under rented at $2,600/mo. The landlord had owned it since the 50s and hadn't raised rents in years, giving me some leverage to negotiate a lower price. 

I bought it with a 75% LTV commercial mortgage at 4.6% with a 25 Yr Amortization. Total money down was about $67,500 (closing costs were close to nothing since I have a hookup at a Title Company).

One month after closing, I raised rents on all units. 2 out of the 3 tenants moved out and I had new tenants within 24 hours. When all is said and done, the rents were $3,550/mo.

Here is the breakdown of our return:

Rent: $3,550/mo

Taxes: $458/mo

Insurance: $475/mo

Mortgage Payment: $1,139.98/mo

Monthly Cash Flow is: $1,427.02

Cash On Cash Return = ($1,427.02 * 12) / $67,500 = 25% as opposed to 8% with the previous rents in place

I wish I could find 2 or 3 of these deals per year!

Carlos,

I like it!

Next time see if you can make the change and still keep the same renters--a challenge. Did you make some sort of positive statement to them about the increase?

Great job!

Best to you!

TM

love it ;)

same story for me only it took 2 yrs bc I have mixed used space. 2 commercial tenants ;)

I love value add properties. they take a while to find. but when we find them it's worth the wait

@Tom Mendez

 It was tough. They knew they were basically living for free so when I raised the rents, they knew it was coming. The two that moved out just couldn't afford the $300 increase per month, but that was market rent. It was a jump from $700 to $1,000. I actually got $1,050 ($50 more than I anticipated) for one of the units with new tenants. 

Good job!

TM

Carlos! What a great story! Thank you for sharing. How did you come across this property? Also, how did you communicate with the tenants once you gained ownerhsip of the property? Knock on the door? Sent a letter?

I just bought a duplex and I'm feeding the current tenant in there carefully as she is currently paying below market rent. But I'm in NY, so I'm worried most about aggravating her and she stays and doesn't pay. So that's the basis of me asking the question above.

Again, congratulations!! We want to hear about another one!

Originally posted by @Carlos Rovira :

Just thought I'd share a big win to inspire other investors:

I recently purchased a 3 unit triplex in Hialeah, Florida for $270,000. It was below market value for that area and I bought it under rented at $2,600/mo. The landlord had owned it since the 50s and hadn't raised rents in years, giving me some leverage to negotiate a lower price. 

I bought it with a 75% LTV commercial mortgage at 4.6% with a 25 Yr Amortization. Total money down was about $67,500 (closing costs were close to nothing since I have a hookup at a Title Company).

One month after closing, I raised rents on all units. 2 out of the 3 tenants moved out and I had new tenants within 24 hours. When all is said and done, the rents were $3,550/mo.

Here is the breakdown of our return:

Rent: $3,550/mo

Taxes: $458/mo

Insurance: $475/mo

Mortgage Payment: $1,139.98/mo

Monthly Cash Flow is: $1,427.02

Cash On Cash Return = ($1,427.02 * 12) / $67,500 = 25% as opposed to 8% with the previous rents in place

I wish I could find 2 or 3 of these deals per year!

 This is excellent news! Great job Carlos

FYI.....Rent - PITI does not equal cash flow. It's good you were able to increase the rents or this would have been cash flow negative when you factor in the true costs of owning rental property that you have forgotten about such as

Vacancy

Management

Repairs

Capital Expenses (Roof, HVAC, Water heater, cabinets, appliances, siding, windows, etc)

@Rebecca Peters The deal came to me from a realtor friend of mine. It was on the MLS. Actually, the way I found it was that I came across another property that was right next door to a property that I currently own. It was also on the MLS. I saw that the listing "broker" was the father of this friend of mine. I called him up and he told me that the property was already under contract, but that they had another one available for me to look at. And that is how I found it. It shows the power of having a strong network. Had I not called my friend about the other listing, I may have never found this property.

Regarding communicating with the tenants, I just sent them written notice prior to closing that the property was being sold to new owners and new instructions on how to pay rent, then after collecting the first months rent (as a reserve), I sent a follow up letter letting them know that their rent was being raised, and just waited for calls to come in. 

If your tenant is paying below market, chances are they most likely know it. They will obviously not say anything to you about it. Should you serve them a notice of increase in rent, it will not come as a surprise to them. They will then either make the call of staying or finding another place to live that they can actually afford. As long as you are civilized and work with them on it (i.e. give them ample time to find a new place, weigh their options, etc.), you shouldn't have any problems. 

Great story, better deal!

How much time was remaining on the leases when you took over? If these tenants had been living there for years, were you at all concerned about squatting or destruction of property? Was there any discussion with tenants prior to purchase?

Edit: you just answered my question in the response before mine. Thanks and good luck finding another!

You definitely did find a great deal and those are good numbers, but you do need to acount for other expenses. Your cash on cash return isn't going to be that high. There's going to be expenses, roughly 50% of the rent, (monthly small repairs, cap ex 10% of rent, property management if you use one, vacancy is typically 8% per year, garbage, sewage, and others). The true monthly cashflow will probably be somewhere around $800-$900 per month. But still, that is really good and if it's in a decent B class neighborhood it's certainly going to be a great buy and hold.

@Vincent Crane

 Vacancy rate will be 0%. In Hialeah actually, they've been known to have negative vacancy rates (even through the recession), since you have multiple families sharing rentals. All utilities, garbage, water, sewage, etc is paid by tenants. I self manage the property (eventually I'll hand it off to management, lowering the return). Also, I put strict leases in place that require tenants to take care of basic maintenance of the property. Unless there is something major with regard to structure, etc, Cap X is relatively low. But yeah, you're right, the "true" return will always fluctuate. 

@Carlos Rovira

Awesome job Carlos!! And yes he's right, he will have no problem with vacancies and good tenants in Hialeah. It is one of the best rental markets in South Florida. 

@Carlos Rovira 0% vacancy? Well it depends. In this area of Miami is (with the proper due diligence) achievable. Hopefully damages are minimal and turnarounds are a non-issue. Im talking about trash-out, touch-up paint, clean-out and multiple offers all on the first week. If you move fast you could achieve it. 

We own RE less than a mile south of you - Doral. Down here the new developments (residential/commercial) are pushing sales/rentals upward. One of our units is already at 8% appreciation in six months. Rentals have jumped $200 (sometimes $300) a month. The city here is promoting the premium high scale life and things are - hot. It seems that we both saw the same writing on the wall. 

The bottom of households are finding ways to cope with the incrementals. Their alternatives are areas like Hialeah and Miami Lakes. So they are heading your way. Anything north of this and you are now in Broward County. This deal you acquired is solid. Hopefully Roofing, HVAC,elect/plumbing are sound. Congrats and we also consider multi-families if the numbers are similar to yours... All the best.

First of great job at raising the rents and increasing cash flow. The numbers do seem good from my brief calculations. But nothing crazy like a 23% Cap Rate. Posts like this drive me crazy. 0% vacancy, no repairs, tenants are going to take care of the maintenance, and I managed it myself. Ya right! I'm assuming you have only owned this short term because if you had a history there is no way you would be getting 23% Cap Rates. I say 10-13% is more realistic without even crunching the numbers accurately. I would also question the 0% vacancy in a triplex. It's my understanding that long term tenants tend to live in SFH compared to a multi unit. I'm new to all this so please correct me if I'm wrong but this just seems waypoint there.
Originally posted by @Account Closed :
First of great job at raising the rents and increasing cash flow. The numbers do seem good from my brief calculations. But nothing crazy like a 23% Cap Rate.

Posts like this drive me crazy. 0% vacancy, no repairs, tenants are going to take care of the maintenance, and I managed it myself. Ya right! I'm assuming you have only owned this short term because if you had a history there is no way you would be getting 23% Cap Rates. I say 10-13% is more realistic without even crunching the numbers accurately. I would also question the 0% vacancy in a triplex. It's my understanding that long term tenants tend to live in SFH compared to a multi unit.

I'm new to all this so please correct me if I'm wrong but this just seems waypoint there.

 Agree 100%. That said, I want what he's smoking.. ;)

@Carlos Rovira

That's great that you were able to push your rents up after closing. You're mixing up CAP rates and COC however. You're referring to COC and not CAP rate. @Account Closed is dead on. You haven't factored in anything for vacancy or maintenance. You will always have vacancies at some point and things break. I would be surprised if your vacancy and maintenance combined are under 15%. Based on a reasonable vacancy and maintenance factor and your other expenses, I think a more realistic COC projection is around 14% which isn't particularly great on multifamily.

How about other cost like utility and maintainance? Does the tenants pay water?

@Carlos Rovira great job.  I can honestly say that I have been looking in the east Hialeah area, which is where im pretty sure you bought the triplex, but the prices are so high in the area.  I currently own zero properties.  My wife and I have been doing a lot of research to get into multifamily homes.  Your deal was a killer one.  We hope to own our first in the near future in the same area.  We are very familiar with Hialeah so we see the potential of buying and renting in that area.  

Lets revisit this deal for the sake of learning. Do take it easy guys. No need for rants. I am buy-n-hold nearby this Miami area. I don't own multis but do own SFR's. So multi-families have been on my radar for some time.

I re-did the numbers considering observations made from various posters above. COC is probably not as originally planned but still a healthy 16.6%. I am getting a Cap Rate of 4.2% (anything wrong with these formulas?). Repairs are at $3000 annually (under normal conditions) and this is with solid lease agreements in place. I just don't see how this triplex can have more than $3000 of consistent repairs or CAPEX a year (however I do noticed where avg built year for these structures is around 1960-1975). The market rental is hot in this area and pre-showing the units and having a new tenant lined-up by end of existing lease is very doable. I know. I know... for sake of this exercise I will consider 3-months vacancy rate. This is equivalent to one month per unit per year (trash-out, touch-up paint and clean-out before re-occupancy). @Mike D'Arrigo  very accurate your suggested 15% (vacation/repairs rate). Here are the numbers:

Is this more in line with reality? I know this is all proforma. I'm just attempting to have educated estimates. @Patrick L. @Account Closed It was not intentional to hijack your post - just trying to learn. 

A better outcome solving Cap Rate with the appropriate NOI calculation...

Originally posted by @Carlos Rovira :

@Tom Mendez

 It was tough. They knew they were basically living for free so when I raised the rents, they knew it was coming. The two that moved out just couldn't afford the $300 increase per month, but that was market rent. It was a jump from $700 to $1,000. I actually got $1,050 ($50 more than I anticipated) for one of the units with new tenants. 

Based on this, the new rent is $3050 (1000+1000+1050), not $3550...

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