Good Markets for Reinvesting 1031 Proceeds-Cap rates of 6% or more

18 Replies

What are good U.S. markets to get 6% or better cash on cash returns in multi-family? 

In the next 3 months I will be doing a 1031 exchange. Significant cash coming out of the sale.  Looking for stable income moving forward. I'm an experienced real estate investor (but not in multi-family). 

Hi Doug,

From the sounds of it this will be a passive geographically agnostic move for you. One product we're seeing clients go into are TIC projects. The TIC stands for tennant in common which is how your investment is held, as a tennant in common on a much larger property. This is what makes it eligible for 1031 treatment. However, contrary to most 1031 real estate investments TIC projects are typically sold by SEC licensed broker dealers. A quick google search for multi-family TIC projects would be a good start.

Although the most familiar TIC projects are things like Walmart markets, Walgreens, large shopping centers and office buildings, there are quite a few multi-family projects scattered around in every market.

Do your due diligence as liquidity can be a concern as well as management capability and true ROI. But they do offer the holy grails of leverage, passivity, and tax-deferred treatment.

Dave

@Dave Foster  

I agree with much of what you said. However, I've seen many bad TIC deals. In fact, I used to sell TIC deals. What I dislike about them is you really have no control. If you had your money in a building you do have the ability to fire you manager, sell the building etc. You lose all of this and more with a TIC. You're going to depend on someone else . Like I said, I've seen some failures in this area. It does do exactly what you said, it provides an easy entry method to do a 1031 exchange. But I'm sure you'll agree, never do anything just because of taxes.

Best to you Dave.

Well said @Jim Piper.  Due diligence begins in the mirror and ends at the back door.  In Doug's case he's already calculated the benefit of the 1031 and is looking for the best vehicle that will match his tool kit.  

Dave

@Doug D.  , there is a difference between 6% cap rates (as mentioned in the title of this thread) and 6% cash-on-cash (as mentioned in your post). Finding 6% cash-on-cash is pretty easy in most markets if you use leverage. Finding 6% cap rates, on the other hand, is a different story.

If you don't mind owning B & C class properties, you can find stuff in the 6% cap rate range in Texas and several other growth markets. If you want to look only at A class properties, 6% is more hit and miss. It can be found in secondary and tertiary markets but less likely in core markets and highly unlikely anywhere in California.  I suggest you consider larger MSAs (you'll have to go slightly out of town from the city centers) in Texas, Oklahoma, North Carolina, Arkansas, Florida, Tennessee, Ohio, Georgia, and Alabama.

Others have discussed the pros and cons of TIC investing and I agree with all of the above. In the case of a TIC, each investor owns a fractional interest in the property and all investors must agree to sell, finance, etc. The control of the asset is very fractured...there is no centralized control.

There is one additional option, however, and that is investing in a larger property purchased in a Delaware Statutory Trust (DST) sponsored by an experienced real estate operator. In the case of a DST, the investment sponsor is (typically) the trustee of the trust and has the authority to sign on the loan and convey title. It mitigates some of the risks of TIC investments. Structurally, it looks more like a GP/LP arrangement commonly seen in multifamily syndications. The difference is that 1031 treatment is possible in a DST transaction, where it is not in a typical syndication.

The quality of the sponsor is the key component to the success or failure of TIC and/or DST opportunities. That said, the same goes if you invest in multifamily directly rather than in a TIC or DST. In that case, however, the sponsor is YOU and you have to evaluate whether you have the knowledge and experience to successfully execute in the multifamily space. If you don't have the knowledge, you can learn. If you don't have the experience, you WILL learn...perhaps the hard way. But let's hope not!

Good catch @Brian Burke . DST's do provide another alternative that can be made inside the 1031 window. Limitations in control and voting in a DST are offset by easier financing and lower investment threshholds usually. Same issues of knowing who you're dealing with.

Dave

Hi Doug,

Define significant??

Do you want to own the property by yourself??

If so throw out the partnerships and all the other things that have been mentioned.

It comes down to do you want control and single ownership or just the  return?? You can in a partnership or other entities set up voting controls by shares etc.

Not an expert on syndicating like Brian is.

I think before you decide multifamily is the way you need to call and talk to different experts in various fields while you have time.

I get contacted all the time and sometimes they buy commercial and other times it's not what they had envisioned it to be.

I just like talking to people on the phone because typing it would take days. Investing is situational and each buyer is different

I don't know how much your exchange proceeds are. My clients have millions into the tens of millions and higher.

So someone might consider 250,000 from an exchange significant but when you get into commercial and large multifamily it is not enough to do a deal on your own with due diligence, legal, closing costs, down payment, reserves, etc.

What current asset class of investing are you experienced in?? 

Hope it helps.

@Brian Burke   mentioned Ohio, which I would concur. There are a lot of unique "bedroom" communities outside of just about every metro area where you can find B properties with 10%cap... Engelo Rumora in Toledo is doing turnkeys

http://www.ohiocashflow.com/

And look up Ben Leybovich from Lima, Ohio. He's been able to achieve some really fantastic things with multifamily investing in a largely unknown Ohio city.

Best of luck.

Any of the big Texas cites should meet your needs,  with good job and population growth, too. 

And welcome to BiggerPockets, Doug!

Originally posted by @Brandon Sturgill :

@Brian Burke   mentioned Ohio, which I would concur. There are a lot of unique "bedroom" communities outside of just about every metro area where you can find B properties with 10%cap... Engelo Rumora in Toledo is doing turnkeys

http://www.ohiocashflow.com/

And look up Ben Leybovich from Lima, Ohio. He's been able to achieve some really fantastic things with multifamily investing in a largely unknown Ohio city.

Best of luck.

Hi Brandon,

Thanks for the plug :)

I am sick of seeing @Ben Leyboviches Yocum Realty sign on the side of the road every time I am driving to Toledo from Dayton haha

Thanks and have a great day.

Hahah - It's a big YELLOW sign...

Originally posted by @Ben Leybovich :

Hahah - It's a big YELLOW sign...

It sure is

Great spot also.

Well done :)

We still need to catch up but your too important for me??? lol

Have a great day mate

Originally posted by @Brandon Sturgill :

@Engelo Rumora  No worries. Have you seen @Ben Leybovich video on his profile...pretty awesome. Glad to claim Ohio bragging rights for two Ohio REI superstars! ;)

Cheers

 I see enough of him all over the social media and on BP lollol

Jokesss

I will check it out.

Superstars??? Love it

Ben,

What you think about that one?

I would joke around sometimes and answer the phone with "Engelo Rumora speaking, your property investment specialist, how can I excite you today?" haha

Might change it to "Engelo Rumora speaking, superstar investment specialist from Ohio"

haha

@Doug D. - DST and Syndication model aim to accomplish somewhat different objectives, as I see it. DST is more of an A Class, stable, wealth-preservation and financial planning play, while Syndicated PPMs are more high risk/high yield, re-positioning, wealth -building plays. Al of us, just as the market itself, go through life-cycles where both can serve a purpose.

As @Brian Burke mentioned, DST accommodates 1031. There are also taxation benefits at the exit or roll-over time. Brian knows more about this than I do. Frankly, Brian knows more about most things (aside for violin-playing) than I do :) Another guy whose knowledge base I respect is my broker at Yocum Realty (OH), @Tim Stanford   - incidentally, he is licensed to represent DST products in Ohio, and can hook you up with folks in other states as well.  While I busy myself with syndication of apartments, and am obviously partial to that vehicle.

@Engelo Rumora  - @Brandon Sturgill  is right about you - you are a superstar.  I am more comfortable as a Prima-Dona :)

Brandon - thanks indeed for shout-out :)

thanks to all for your insightful responses. As a former ( non practicing) real estate attorney, one other consideration in the TIC or syndication options is that when the interest is sold it cant be rolled over to another 1031 property. I prefer to maintain control and flexibility. Im from LA and know that in California it is nigh impossible to find 6% cap rates except with really risky property. In my original post i mentioned I would be getting a "significant " amount of cash out of my exchange. One comment appropriately asked what is "significant" since that could determine the type of investment options available. In my case it is about $3.0 million. with leverage that can translate into a decent sized investment(s) depending on the market. I have alot of experience in building and substantial remodels in single family homes and have done well. Not so experienced in apartment or commercial.. I would consider commercial but need to educate myself more...residential just feels more comfortable to me due to my past experience

Im not afraid of value add ( thats what i do in single family) but with the funds coming out of my 1031 I need to replace steady income formerly coming from my job, so cant gamble too much ( have other funds to do s little more "value add" investing).  

have been  looking in Portland, OR. Seems like its possible to get 6% cap rates  in multi family but a little worried about job growth and possible over building there. its a hot City for young people but less strong employment opportunities than elsewhere. Any ideas on Memphis, Denver or other markets.  

thanks all. 

2 cents: Low vacancy rates make multi-family investing very attractive in Portland, I'd say, but that's a pretty competitive Buyer's market here.

http://oregonon.org/blog/2014/portland-had-second-lowest-metro-area-rental-vacancy-rate-in-2013/

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