Realistic turn key cap rates?

Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes

check out Bries turnkey reviews site.. lots of turn key companies advertsing actual deals.

8 to 12% seems to be the returns these days..

but if you have a million in cash I would be investing in your market.. were you have a great chance for appreciation over the holding period.

and or collaborating with developers and other movers and shakers you can make quite a bit in the right deal with that amount of cash

Like flips in the Hollywood hills Beverly hills etc

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Zane O.

Investor / Real Estate Agent · Amarillo, TX · Member since 2015 · 68 posts · 11 votes

10y

well, in our area, for anything over 8-9%, you're going to do some significant value add or take some pretty good tenant risk (work), so it will ultimately depend on the area/region you focus.

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Mike D'ArrigoPro Member

Turn key provider · San Jose, CA · Member since 2010 · 4k+ posts · 3k+ votes

10y

@Account Closed It's going to vary by property class and market. You mentioned that you're looking at both the Midwest and Texas. You're going to find vary different returns between those markets. Texas has some of the highest property taxes and insurance rates which of course drives your returns down. In Midwest markets like Indianapolis and Kansas City, the returns are typically in the 8-9.5% range.

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Jason Hawk

Real Estate Services · Olathe, KS · Member since 2015 · 329 posts · 57 votes

10y

The 10% is very realistic is Kansas City, The price of property to rental price is excellent. Message me to discuss

Jason

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Gordon CuffePro Member

Investor · Roseville, CA · Member since 2009 · 1k+ posts · 587 votes

10y

@Account ClosedAs you can see 10% is very easy to hit as a goal. Now you can pick a Midwest city and network with other investors and wholesalers so that you can find good off market deals. I have been marketing to find off market deals but it is getting more competitive to get these deals. You can meet people here and rei meetup clubs of the city that you want to buy in. If you ever have questions ,you can always shoot me a email.

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Ali Boone

Real Estate Coach · Venice Beach, CA · Member since 2012 · 6k+ posts · 3k+ votes

10y

You can definitely hit 10% with turnkeys. My first recommendation for turnkeys with those returns are Chicago. Super cool properties there, plenty of MFRs available, all fully redeveloped and not just cosmetically rehabbed.

The other market that comes to mind is Philly. They have full-out turnkeys, SFRs and MFRs, that hit that level of return. But another option you could consider there, if you were okay with a smidge more risk, is through the same turnkey provider you can fund the purchase and rehab and you end up forcing equity. You get the same end-product but you buy in a different phase of the process, and in the end you are the one with the forced appreciation/equity. I only mention that option because of your potential $1M budget. Plenty of cash to do it. Normally I don't recommend that method of turnkey because the companies who do it don't also offer finished products to know what you are getting and the consistency, but this company does.

So, definitely some options out there!

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Chris DawsonPro Member

Real Estate Broker / General Contractor / Property Manager · Kansas City, MO · Member since 2010 · 395 posts · 425 votes

10y

@Account Closed, Kansas City can easily provide you a 10% return on a million dollars worth of real estate. For that amount of money, you could buy a portfolio of SFRs or you could buy 1 or 2 good multi family properties. If you leveraged that money, you could buy a lot more and get an even better return than 10%.

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Andrew SyriosPro Member

Moderator

Residential Real Estate Investor · Kansas City, MO · Member since 2014 · 10k+ posts · 5k+ votes

10y

I would say you're probably looking at 8-10% for the most part. But be very careful and make sure to vet the property and the turnkey company very carefully. There are good operators, for sure, but there are also unfortunately, a number of bad ones.

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James Wise

Real Estate Broker · Cleveland Dayton Cincinnati Toledo Columbus & Akron, OH · Member since 2013 · 31k+ posts · 20k+ votes

10y

With current market conditions 7-10 is roughly what can be expected here in my market (Cleveland, Ohio)

The nicer the property location and tenant quality the closer to 7 you get. As you go up towards 10 neighborhood and tenant quality will go down.

If your considering this part of town as a potential investment target you will want to give The Ultimate Guide to Grading Cleveland Neighborhoods a read.

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Jay HinrichsBusiness Member

Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes

10y

@James Wise some how getting worse tenants and a higher return seems like a disconnect.

I suspect over a 5 year run the better property with the lower cap rate or return will in fact be higher than the one with the higher starting return and poor tenant base..

its all blue sky for the first few months or year or two .. but then reality sets in on those tenant bases that are not so hot.. or harder to manage.

there is a Risk=Reward function I get that you need a higher Paper return to justify those properties.

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James Wise

Real Estate Broker · Cleveland Dayton Cincinnati Toledo Columbus & Akron, OH · Member since 2013 · 31k+ posts · 20k+ votes

10y

Originally posted by @Jay Hinrichs:

@James Wise some how getting worse tenants and a higher return seems like a disconnect.

I suspect over a 5 year run the better property with the lower cap rate or return will in fact be higher than the one with the higher starting return and poor tenant base..

its all blue sky for the first few months or year or two .. but then reality sets in on those tenant bases that are not so hot.. or harder to manage.

there is a Risk=Reward function I get that you need a higher Paper return to justify those properties.

More or less I essentially agree with what your saying or at least the theory behind it.

I always tell people that

"spreadsheet don't rent properties. Tenants do and tenants don't care what your spreadsheet says."

I don't know that the higher end property will always perform better but it will usually perform closer to what you expected it to do. A higher end property is like a landscape of slow rolling hills while a lower end or "C class" property is more like the rocky mountains.

Where investors get into serious trouble is purchasing 1 or 2 properties and looking at them over a small sample size. Any property especially a "C class" property will have dramatic ups and downs. Sometimes you will buy two identical properties in similar neighborhoods and have different results or even have the same property perform differently over time. Sometimes you may go years with one tenant who doesn't ever call you or miss rent then you that tenant moves out and you replace that tenant with two tenants who get evicted or move out within 90 days.

While you had the great tenant in the lower quality property things where going incredible but you definitely have a higher risk of your next tenant being one of the ones who get evicted if you are in the lower quality property as opposed to that boring slow rolling hill suburban property.

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Jay HinrichsBusiness Member

Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes

10y

@James Wise and in some parts of the world were 5 to 7% will also buy you a home that could very well appreciate a ton... in 3 to 5 years.

were as the C's are C's will be C's and that is really the end of the story.. I like to council folks that if your going for C's have a plan to buy 10 or more.. you need to do exactly as you mentioned spread the results .. Amit in the bay area talks about this .

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Mark Oriold

Real Estate Agent · North Olmsted, OH · Member since 2016 · 36 posts · 4 votes

10y

Hello, I'm in Cleveland. I see a cap of 8-9 on average. It's not unrealistic to see some in the low teens. The risk is a little higher though. Markets vary. So review your financial goals and follow to the appropriate market.

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Matt R.

Sherman Oaks, CA · Member since 2013 · 3k+ posts · 2k+ votes

10y

Originally posted by @Account Closed:

I know I know this has been asked a ton of times before, however, in the current market, what are some realistic cap rates for fully turn key (managed) properties (multi units/apartment block) one could achieve as an out of town investor in a relatively safe neighborhood with say $1m in cash to put towards a property? Is 10% achievable?

I live in LA and the prices and cap rates are not beginner investor friendly so I am considering looking in other states (mid west, Texas etc..)

As I do not have access to the MLS the good deals are impossible to find as a newbie. I'm sure many here feel the same and can feel alienated from the fact that we're competing against the big boys, banks, buy and hold investment groups etc.. and don't want to end up buying a "pig with lipstick"

Would I have more luck finding some colleagues on here to achieve finding a 10+ cap rate or scouting endlessly on Redfin/Loopnet for properties? Going to auctions?

Cap rates don't apply to single family homes. Just ask your appraiser next time what the cap rate is. Cap rates are for commercial. Sure you can calculate but they mean little. For example, the top 3 cities in the nation since 2000 for SFR total returns are LA,SF and San Diego. Think big picture. If you want to invest Cleveland James Wise is the man still!

Good luck with your search!

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John D.

Rental Property Investor · La Quinta, CA · Member since 2014 · 1k+ posts · 779 votes

10y

@Matt R. for purposes of comparing similar properties to each other, whether SFR or multi, the CAP rate can be a useful rule-of-thumb type metric. You may choose not to apply them to single family homes, but that doesn't mean the metric is entirely useless or for some reason entirely irrelevant.

In your post you say "For example, the top 3 cities in the nation since 2000 for SFR total returns are LA,SF and San Diego." I feel confident saying your vague term "total returns" is less useful then CAP rate, which at least has a generally understood and accepted definition, NOI / asset value (or price).

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Account Closed

Investor · Honolulu, HI · Member since 2013 · 3k+ posts · 1k+ votes

10y

Originally posted by @John D.:

@Matt R. for purposes of comparing similar properties to each other, whether SFR or multi, the CAP rate can be a useful rule-of-thumb type metric. You may choose not to apply them to single family homes, but that doesn't mean the metric is entirely useless or for some reason entirely irrelevant.

In your post you say "For example, the top 3 cities in the nation since 2000 for SFR total returns are LA,SF and San Diego." I feel confident saying your vague term "total returns" is less useful then CAP rate, which at least has a generally understood and accepted definition, NOI / asset value (or price).

Um, exactly how would you use a cap rate on SFR's? I think it is impossible.

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John D.

Rental Property Investor · La Quinta, CA · Member since 2014 · 1k+ posts · 779 votes

10y

@Account Closed

You would naturally calculate the NOI or expected average NOI over time, and divide it by the properties purchase price, or value, or offer price, or related. If you have one SFR with $10k in NOI and a $100k expected purchase cost, and another similar SFR with $13k NOI and a $110k expected purchase cost, you might calculate the CAP rate of both and determine that property 1 has a CAP rate of 10%, and property 2 a CAP rate of 11.8%.

Assuming the properties were similar in most other other attributes (excluding the previously stated variances in NOI and purchase price) you might reasonably assume that property 2 is likely superior, and therefore might spend more time running further analysis and spending more time researching property 2.

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Account Closed

Investor · Honolulu, HI · Member since 2013 · 3k+ posts · 1k+ votes

10y

Nope John. NOI's of similar will sell for generally the same cap rate. If the market is buying at 10 caps then the $10,000 NOI WILL SELL FOR $100,000. and the $13,000 NOI WILL SELL FOR $130,000. See, you are doing it backwards.

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John D.

Rental Property Investor · La Quinta, CA · Member since 2014 · 1k+ posts · 779 votes

10y

SFR NOI's of the similar will generally NOT sell for the same CAP rate, as CAP rate is not used in determining SFR value, comps are. A SFR on a busy street, or a weird lot, may see a 30% discount in value, but only a 15% discount in rent. A higher discount in value on the sale price (as opposed to the rent rate) for certain neighborhoods/features/oddities is extremely common. The purchase price variance is typically much greater then the rental rate variance.

You really can't say that CAP rates are irrelevant with SFRs on the left, and then say on the right that NOI and sale price for SFRs are nearly perfectly correlated. If they are indeed highly correlated as you say, then CAP rates are an awesome metric for use comparing SFRs.

If NOI and sale price are indeed highly correlated for SFRs, then it's the perfect metric. They are not of course, as the acceptable cost to a home buyer (in purchase price) and a home renter (in rent) vary greatly based on various attributes of a home -- with the former typically having a much greater variance as a percentage, then the latter. As an example, a home that is significantly outdated from a style perspective will often sell for significantly less then an updated home, but only rent for a bit less. The price variance is greater in the sale price, as compared to the market rental rate, for SFRs. This variance diminishes in multi-family and commercial properties.

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Justin Shepherd

Real Estate Agent · Lancaster, CA · Member since 2016 · 8 posts · 2 votes

10y

I'm in the LA area of you're looking to network. I would love to help. I'm currently closing on a deal with a 15% cap and a HUGE cash on cash return. Theres deal out here

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Account Closed

Investor · Honolulu, HI · Member since 2013 · 3k+ posts · 1k+ votes

10y

Originally posted by @John D.:

SFR NOI's of the similar will generally NOT sell for the same CAP rate, as CAP rate is not used in determining SFR value, comps are. A SFR on a busy street, or a weird lot, may see a 30% discount in value, but only a 15% discount in rent. A higher discount in value on the sale price (as opposed to the rent rate) for certain neoghborhoods/features/oddities is extremely common. The purchase price variance is typically much greater then the rental rate variance.

You really can't say that CAP rates are irrelevant with SFRs on the left, and then say on the right that NOI and sale price for SFRs are nearly perfectly correlated. If they are indeed highly correlated as you say, then CAP rates are an awesome metric for use comparing SFRs.

If NOI and sale price are indeed highly correlated for SFRs, then it's the perfect metric. They are not of course, as the acceptable cost to a home buyer (in purchase price) and a home renter (in rent) vary greatly based on various attributes of a home.

Nope John D. Those are not similar properties in your example. Cap rates could have some value if there was a reliable third party source that analyzed all SFR sales and then reported the results. But that is costly and time consuming and not worth it for the little value it will give you when comps will do a much better job.

Also doing it backwards requires you to commit to a purchase price BEFORE there is a meeting of the minds between the buyer and seller. That is just a waste of time.

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John D.

Rental Property Investor · La Quinta, CA · Member since 2014 · 1k+ posts · 779 votes

10y

Those are similar, not identical properties. Their variance in the ratio of NOI to purchase price or property value is a useful indicator, in determining which property might make more sense for an investor. And naturally that ratio is the definition of CAP rate.

To say that there is little or no value in comparing the variance in the NOI/Price ratio between like properties is absurd. Naturally, a higher NOI/Price ratio is favorable between like properties. And naturally, such a variance exists in many cases.

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Account Closed

Investor · Honolulu, HI · Member since 2013 · 3k+ posts · 1k+ votes

10y

Nope John D. You are fighting logic. If two similar BUT not identical properties have the exact same NOI say $10,000 and one sells at a 5 Cap for $200,000 But the other sells at a 10 Cap for $100,000 you'd have to think the market VALUES the 5% property more because they are willing to pay TWICE as much for the chance to collect the same NOI.

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John D.

Rental Property Investor · La Quinta, CA · Member since 2014 · 1k+ posts · 779 votes

10y

The market largely does not value SFRs based on the ability to collect NOI. The ability to collect NOI is not a determining factor, in how most SFRs are priced. Rather it is the use of comps, and the perceived value to an owner-occupier.

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Account Closed

Investor · Honolulu, HI · Member since 2013 · 3k+ posts · 1k+ votes

10y

Originally posted by @John D.:

The market largely does not value SFRs based on the ability to collect NOI. The ability to collect NOI is not a determining factor, in how most SFRs are priced. Rather it is the use of comps, and the perceived value to an owner-occupier.

EXACTLY! You can't use cap rates for SFR's.

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Realistic turn key cap rates?

Realistic turn key cap rates?

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