Multi family price craziness

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Multi family price craziness

Mark A.
Attorney · Hoboken, NJ · Member since 2016 · 24 posts · 17 votes

I am current resident of Hoboken, NJ, and a yet-to-be property investor.  I am currently looking for a great place to invest my money.  I have spent a decent amount of time understanding the basics of equity investing, and other than placing my money in index funds, i do not think it is for me.  At least not at this point in my life.  

My Journey has led me to real estate investing.  At this point, i have devoted a substantial amount of time to real estate investing and feel that i have a fairly decent understanding of the basics.  Obviously without doing a deal, and actually collecting rent i have yet to fully understand any of the practical aspects of it.  However, i do believe i have enough of an understanding to know when something is a "good" deal, at least on paper.  

It befuddles me understand the current marketplace surrounding me, and i am hoping some of the more experienced investors can chime in and help me understand it.  I am, of course, talking about the NYC Metro area.  I have yet to see a multi family property, whether that be in Hoboken, Astoria, Brooklyn, Jersey City, or even any parts in Queens, that come any where close to providing 10% Cash on cash return, after taking into account all necessary expenses.  In fact, many properties are listed at prices where the collected rents will not even cover the mortgage payment.  This to me, seems ludacris, and i do not understand what "investor" would possibly put their money into such a thing.  

Please do not respond back to me "you need to look outside your local area", as you will be missing my point.  I am interested in understanding the price dynamic for these "investor" properties, which are supposedly based upon their income.  Is it based upon pure speculation regarding market appreciation? Is it a bubble market? Is it too many investors (like Mr. David Greene's recent great article speaks to)? Or have i completely overlooked something? 

Your feedback is greatly appreciated!

Mark

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Llewelyn A.
Investor / Broker · Brooklyn, NY · Member since 2016 · 665 posts · 1k+ votes
9y

@Mark A.

The Answer is actually quite easy.

The Valuation of an Investment is underwritten using an Internal Rate of Return (IRR), not just a simple Cash on Cash Return (CoCR).

So, what does an IRR take into account? EVERYTHING. So why would you use just CoCR? Beats me. But as others have mentioned, if the Cashflow isn't a necessity upfront (but typically an IRR Investment Property will give you large cashflow in later years), then it is difficult for someone who needs the Cashflow NOW to invest in IRR Investments. This debate has been going on an on on this forum.

I invested with Partners and we own approx. $15 Million of Brooklyn Properties that we bought in the span of 20 years. We have been making Millions in profits and a very healthy Cashflow over time. We are expanding our portfolio of MF properties in Brooklyn. The last Property we bought was last November for $1.71 Million. We are now targeting MF properties around $2 Million plus.

Our IRR target is around 15% IRR given a 10 year holding period. That's quite doable. You just have to know how to do the calculations and work out the details with the properties and future economic developments.

IRR can evaluate everything, including hot Markets like Brooklyn and Cashflowing Markets like the ones mentioned by others on BP.

CoCR can only evaluate Cashflow Markets.

Here is a really good Article everyone should read by Ben Leybovich of BP:

Cash Flow vs. Appreciation: What Experienced Investors Know About the Debate That You Don’t

Here's one of the quotes: "I've written about the IRR a lot; please look up the other articles. Having said this, have you ever wondered why big time investors never give a hoot about things like cash on cash (CCR) and capitalization rate (Cap Rate), and all they want to know is the IRR? Why is this?"

I recommend reading the Article. However, it will take some time to understand IRR.

Once you get an understanding of it, then you can make your decision on whether or not you want to own in Markets where the CoCR doesn't make sense to own the Investment but the IRR tells you it's a Fantastic deal!

Personally, those that only use CoCR keeps my competition away from the best deals. That's the way I like it.

Investor Llew

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  • Darwin Crawford
    Rental Property Investor · Scottsdale, AZ · Member since 2016 · 296 posts · 243 votes
    9y

    Mark,

    While I am across the country, I look at different markets on the daily, and I get your frustrations.  In short, right now there is a lot of free capital seeking yield.  That, coupled with cheap money, has depressed cap rates severely in the MFH markets all across the country.  I have watched some sales here, and just don't understand them.  

    Out here in the southwest, things are back to booming, tech jobs are pouring into sunny Arizona, and if you can find a 6.5cap MFH in a b/c area you are just flat kicking a$$. They barely exist, and the only reason the big guys are buying is that $ is cheap and the CoC returns are high with cheap leverage.

    It took me months, and months of looking here for MFH before I gave up and went commercial for my first 8-unit deal, and I did it for precisely the reasons that you outlined. I have heard of a few deals happening in MFH here, but you really have to be in the right place, at the right time, and very liquid. As in see it, call broker, driver over with $5k EMD check in hand. Preferably more than that.

    I would imagine a competitive market like NYC or nearby is going to be the same.  You just have to be patient, get good (and quick) at underwriting, and then the secret sauce, which I was told by a much richer investor is: be FAST to lock them up, and SLOW to do your DD in escrow.  

    Keep your head in it, I hear your frustration and get it, but it just makes it all the sweeter when you do land a good one. 

    4Reply
  • Thomas S.
    Member since 2016 · 13k+ posts · 12k+ votes
    9y

    What you are experiencing is wealthy individuals investing without any regard or need for cash flow. They are already wealthy and are simply parking cash to benefit from appreciation decades down the road. They are probably second or third generation Nuevo rich that do not respect money.

    3Reply
  • Mark A.
    OP
    Attorney · Hoboken, NJ · Member since 2016 · 24 posts · 17 votes
    9y
    Greg and Darwin, I appreciate your replies. Is it fair to assume that these prices will revert back to normal investor levels at some point? I mean, ultimately, what's the point of purchasing a by and hold type property (assuming it is in ready to rent condition) when you are breaking even COC wise? Are all these buyers just planning on benefiting from equity build up without cash coming in? Is that ever a good idea? It just seems contrary to the basic principals outlined by all buy and hold investors I've read or learned from. Sorry if it seems like I'm repeating myself, I'm just really trying to understand this issue as much as I can.
    0Reply
  • Diane G.
    CA · Member since 2016 · 1k+ posts · 1k+ votes
    9y

    @Mark A.

    I am not a 2nd or 3rd generation of super rich, I am just an average employee in Silicon Valley, making what would be considered a very slightly above average salary...

    I bought a handful properties in San Francisco starting in 08, the previous peak, and was losing $1000/door/month for 3-5 years... But today, sitatuation completely changed... I just finished 2016 tax return, $95K profit (rental income less all all repair, tax, HOA, interest payment, but not including principal payments).... I hope my experience should answer your question of why....

    Now, when I bought in 08, my interest rate of 8%... Once I refi into 4%, I broke even.... With rent increase over the year, I see a bigger and bigger yearly profit, up to 95K in 2016....With today's rate at 4%, if you are losing $1000/door/month, I am not sure how you are going to turn profit just based on further rent increase....

    3Reply
  • Jeff G.
    Real Estate Investor · Sacramento, CA · Member since 2016 · 32 posts · 36 votes
    9y

    First, I see the same thing in California and understand the frustration.  

    However, not all of these investors are speculating on bigger idiots coming along to buy their properties at higher prices.  Some are intelligent investors with radically different goals than you.  For instance, if you are a high earner, especially if you live in a high tax state, you get to buy a property for relatively little money down, get tenants to basically pay off the loan, and in the meantime you get to deduct not only the actual expenses, but also this imaginary expense called residential real estate depreciation. 

    (Residential real estate doesn't depreciate -- it at least holds its value)

    So while investors may break even on a cash basis (perhaps even lose slightly), their tax savings more than make up for it -- especially if they plan on retiring elsewhere & using 1031's to move their eventual capital gains to a lower tax state.

    Plus they also make their income stream more robust.  Disruptions abound, and there is no guarantee that today's high earning XYZ profession will even exist in 5 or 10 years.  

    "Is it fair to assume that these prices will revert back to normal investor levels at some point?"

    I think there is at least as good of a case to be made that inflation will rise to meet these prices (similar to stagflation in the 70's).  Inflation has historically spiked after war-time spending ends:

    While we're still a nation at war (US special operators were active in 138 countries last year!), we'll eventually have to pay the piper and it's a whole lot easier for governments to pay debts in dollars that are worth less and less.  We probably would have seen more inflation already if not for the great recession.  But we may be turning a corner from the recession -- we've just had 6 consecutive month over month rises:

    All of that means there is a good chance you'll be able to pay today's loan with tomorrow's cheaper dollar (while drawing a rental income stream that rises alongside inflation)

    10Reply
  • Thomas S.
    Member since 2016 · 13k+ posts · 12k+ votes
    9y

    It just seems contrary to the basic principals

    It is beyond logical comprehension that anyone would invest and not have a expectation to generate income from day one. Most investors use the profits to further invest or put food on the table. The only logical explanation is that they already have more money than they need and are simply playing at investing. I guess some get lucky but likely most that do not have very deep pockets hit a bump in the road and lose it all.

    1Reply
  • Llewelyn A.
    Investor / Broker · Brooklyn, NY · Member since 2016 · 665 posts · 1k+ votes
    9y

    @Mark A.

    The Answer is actually quite easy.

    The Valuation of an Investment is underwritten using an Internal Rate of Return (IRR), not just a simple Cash on Cash Return (CoCR).

    So, what does an IRR take into account? EVERYTHING. So why would you use just CoCR? Beats me. But as others have mentioned, if the Cashflow isn't a necessity upfront (but typically an IRR Investment Property will give you large cashflow in later years), then it is difficult for someone who needs the Cashflow NOW to invest in IRR Investments. This debate has been going on an on on this forum.

    I invested with Partners and we own approx. $15 Million of Brooklyn Properties that we bought in the span of 20 years. We have been making Millions in profits and a very healthy Cashflow over time. We are expanding our portfolio of MF properties in Brooklyn. The last Property we bought was last November for $1.71 Million. We are now targeting MF properties around $2 Million plus.

    Our IRR target is around 15% IRR given a 10 year holding period. That's quite doable. You just have to know how to do the calculations and work out the details with the properties and future economic developments.

    IRR can evaluate everything, including hot Markets like Brooklyn and Cashflowing Markets like the ones mentioned by others on BP.

    CoCR can only evaluate Cashflow Markets.

    Here is a really good Article everyone should read by Ben Leybovich of BP:

    Cash Flow vs. Appreciation: What Experienced Investors Know About the Debate That You Don’t

    Here's one of the quotes: "I've written about the IRR a lot; please look up the other articles. Having said this, have you ever wondered why big time investors never give a hoot about things like cash on cash (CCR) and capitalization rate (Cap Rate), and all they want to know is the IRR? Why is this?"

    I recommend reading the Article. However, it will take some time to understand IRR.

    Once you get an understanding of it, then you can make your decision on whether or not you want to own in Markets where the CoCR doesn't make sense to own the Investment but the IRR tells you it's a Fantastic deal!

    Personally, those that only use CoCR keeps my competition away from the best deals. That's the way I like it.

    Investor Llew

    12Reply
  • Mike Dymski
    Investor · Greenville, SC · Member since 2016 · 5k+ posts · 13k+ votes
    9y

    Good feedback above.  Mark, it depends on your goals (and market opportunity).  Some people want or need immediate cash flow and others are looking for the long term appreciation.  There is a lot of debate on BP about cash flow vs appreciation and which one is better...and which one is better has nothing to do with one being better than the other.  The better strategy is the one which lines up with your needs and goals.  There are successful investors employing either strategy and some investors, like me, choose to have both types of properties in their portfolios.  You may also find that one strategy lines up with your goals at one stage of your life and then your goals change where another strategy may be more applicable.  Real estate investing is not a one-size-fits-all game.  Investors, markets and strategies are about as varied as anything.

    2Reply
  • Mike Dymski
    Investor · Greenville, SC · Member since 2016 · 5k+ posts · 13k+ votes
    9y

    @Llewelyn A. very well written post, all of my investments are value adds and I am an IRR investor. I followed Ben's article when it came out and agree with it but I am not crazy about that one quote. Big time investors care a lot about CoC returns because many of them have to purchase properties that provide a preferred return to investors throughout the life cycle of the investment. I know it is not your quote and it was intended to make a different point...just wanted to provide clarity that CoC has it's place along with many other metrics in the varied real estate investing world.

    3Reply
  • Llewelyn A.
    Investor / Broker · Brooklyn, NY · Member since 2016 · 665 posts · 1k+ votes
    9y

    @Mike Dymski

    You are absolutely right, Mike, in regards that the quote about IRR Investors was meant as a effect so that there is an understanding that the two are different and implies different Markets and Investment needs.

    The following is for the readers (not Mike Deymski only).

    I will say that there is another reason why those that do have the ability to Invest using IRR valuations (in other words, they don't REALLY need the cashflow but would like to have it) DO NOT simply because they have not spent the time (and I would say it may take months to years) to truly understand the Calculation and how it works.

    It's the most comprehensive calculation you can have and requires you to do a pro-forma 10 year projection.

    The problem I find with a lot of BPer's is that they easily dismiss IRR because it's either too complicated and sophisticated that the newbie will need to spend time to learn it before jumping into Real Estate Investing.

    My personal opinion is that if you truly love Real Estate Investing and are truly motivated, you will eat, sleep and dream about Real Estate. Not wanting to understand IRR is telling me that your motivations may lack the discipline and drive to understand such a critical Analysis. You will certainly be shut out of desirable large Metropolitan areas and wind up concentrating where anyone can do a GRM, CoCR, 1% rule, etc. which are really, non-sophisticated, non-complex calculations.

    Once you can understand and use IRR, you can evaluate ANY Investment.

    If you want to evaluate only Cashflowing Investments using IRR as an example, you set up a series of cashflows which only has the `10 annual Cashflows of the Investment over the 10 year holding cycle. You just assume zero appreciation. Your IRR then acts like all the other Calculations, but it's going to be easier to understand the results because it is entirely comprehensive.

    The Great thing about the IRR calculation is that if you are expecting ZERO cashflow, but you are expecting the Mortgage to be reduced, say a $1 Million mortgage reduced to $500k in 10 years, then that applies to the IRR since you need the Investment for the Purchase and the HYPOTHETICAL Sales Proceeds after the sale of the Investment. The IRR may tell you that this zero Cashflow Investment may be better than a All Cash, cashflowing investment.

    When you learn how to use IRR, then all Markets can be analyzed. Otherwise, you are limited to markets in which the narrow calculations you have learned will work in.

    Investor Llew

    3Reply
  • Ben Leybovich
    Rental Property Investor · Phoenix/Lima, Arizona/OH · Member since 2012 · 4k+ posts · 4k+ votes
    9y
    Originally posted by @Mike Dymski:

    @Llewelyn A. very well written post, all of my investments are value adds and I am an IRR investor. I followed Ben's article when it came out and agree with it but I am not crazy about that one quote. Big time investors care a lot about CoC returns because many of them have to purchase properties that provide a preferred return to investors throughout the life cycle of the investment. I know it is not your quote and it was intended to make a different point...just wanted to provide clarity that CoC has it's place along with many other metrics in the varied real estate investing world.

    Mike - of course we should "care" about CCR. But, CCR is more of an effect of the IRR working. I see it this way:

    While I can make the property work on IRR without CCR, I casnnot really make it work on CCR but without the IRR. Meaning - in my experience the amoount of CCR required to drive the IRR strictly though cash flow is not likely to materialize due to economic losses. On paper it's possible - in reality it is not. Therefore, back-end is needed, and the only effective way to measure the blend is the IRR.

    Now - for some people cash flow is it, period. When preservation is of the essence, the IRR is not and yield is what it's about. We are seeing this play out in the marketplace today. However, if driving returns is of the essence...

    3Reply
  • Daniel O.
    Investor · Takoma Park, MD · Member since 2016 · 166 posts · 147 votes
    9y

    So, to bring the discussion back to the topic of price craziness in MFR, How do people see this playing out over time? It seems like MFR has been bid up to crazy levels, in part by folks chasing yield in a low interest environment. I'm not going to jump on the bandwagon of prognosticators saying we are in a bubble and set for a crash, but the difficulty in finding a good deal in MFR suggests now is not the time. What are the drivers that will cause a price correction? Are these deals typically financed with adjustable rate mortgages that will reset at some point to a (presumably) higher rate? If so, will the returns on other uses of money prompt some to divest themselves of their MFR? I guess what I am asking is, if I don't think now is a good time to be investing in MFR because prices are unreasonably high, what might trigger a pull-back to more attractive purchase prices? Are we better off parking money in other RE that will appreciate and cash flow so that we can pull equity out in a few years to invest in MFR when prices decline?

    2Reply
  • Jeff B.
    Buy & Hold Owner · Redlands, CA · Member since 2015 · 5k+ posts · 2k+ votes
    9y

    IMO, changes in FMR will be the driver - - when people can no longer afford the rents.

    Rents create NOI, the fundamental input to CoC, IRR and CapRate. *IF* rents can't be paid, vacancies will drive rents down, change all of these. Even though the owner may get upside down, as long as there's no red ink, he can just sit awaiting yet another RE cycle.

    If the owner becomes impatient or sick of RE and bails before the recovery, then MFs may be more affordable but will be scooped up just as they are today.

    1Reply
  • Diane G.
    CA · Member since 2016 · 1k+ posts · 1k+ votes
    9y

    Personally, I am waiting for rate to go up to 7%~ 8% level to buy again....Not sure what will trigger a correction, not sure when.... And I am not even try to analyze it because I know I will NEVER guess it right....

    Just patiently waiting.....

    1Reply
  • Jeff G.
    Real Estate Investor · Sacramento, CA · Member since 2016 · 32 posts · 36 votes
    9y

    @Mark A. Since you have a background in equities, you're probably already familiar with IRR as it relates to discounted cash flow analyses. It requires a number of assumptions, so remember the wisdom of Carveth Read: "It is better to be vaguely right than exactly wrong."

    Think of a speculative bet on appreciation as an asymmetric trade with a large possible upside and a known, and limited, downside.  In that sense, CoCR merely reflects whether the trade will have a positive or negative carry in the meantime.

    Finally, and with apologies to Buffett, it is better to buy a wonderful property at a fair price than a fair property at a wonderful price.

    2Reply
  • Mark Fedorov
    Allentown, PA · Member since 2014 · 264 posts · 120 votes
    9y

    Meh... I was a long time investor in Hudson county, and we had about 120 units in Hoboken at one point in time, what I don't see mentioned here is that you are looking at a  cash on cash return, not total return. 

    The properties in the area you mentioned (or Hoboken at least) go up 3-6% per year. That just does not exist in a lot of other areas. If you have an 8% CoC investment, and you figure that you are putting 30% down, and that you will get a 4% increase in sell price per year (and assume you can increase Cash flow 2% a year (you should be able to do better, but keep it conservative) .. break out a spreadsheet and do this your self... you double you cash in 7 years, you will see 40% come cash flow and 60% come from increased market value... so you have to sell to see your profits.

    Most investors, can not handle getting so much value from the increase in RE prices.. that is why it is a tough market... also that is why I got out.

    2Reply
  • Charles Worth
    Investor · New York City, NY · Member since 2015 · 808 posts · 417 votes
    9y

    @Mark A.

    That is the problem with a "great place to invest your money" its only a great place as long as not too many others want the same thing and use the same instrument. The time where so many folks were knocked out of the game and there are ample foreclosure properties is over, maybe for a long time. Today there are a TON of people chasing properties and many of them are necessarily return orientated. Considering where you said you are I will assume you are not going after properties over $5MM where the institutions start to take hold. In the smaller multi space there are a TON of buyers motivated by things that have very little to do with return at all and forget about COC return. Some of them are just looking to park money (foreign buyers, those who have lots of money and want it "protected", etc.), others are buying for their children i.e. passing it along, others are just terrified of getting left out in the cold in related to rent increases. The latter, which are typically owner occupants are especially hard to compete with since they are motivated more by their emotions and/or by what they don't have to pay in monthly costs. Many are in the multi space more by necessity than want because they are priced out of condos or homes.

    Unless you fall into these categories it will be hard to compete with any of them. In many instances, these buyers will be the competition in which case the property is probably lost and trying to figure out a reason is in vain.

    For other properties:

    • 1)Most investors have a view on where the market or a specific sub-market are going. As people mentioned the major function is not COC but total returns and this means you need to take a stand on where the market is headed as a whole OR where a specific submarket is. For instance, if you think East Harlem will rise to X level well there is your return. Of course, the big question is not if you can make the numbers work here but if you are right in your assumptions. Be right and you will almost certainly make enough money that the investment makes sense, be wrong and you probably won't. By the way that doesn't mean you have to be right about everything. You can be wrong about the East Harlem submarket but if the overall NYC market goes up 20%, you probably still do well because East Harlem will probably go along for the ride unless something happens there that is specific to East Harlem. Considering where Hoboken has gone I assure you @Mark Fedorov   has made a good amount of money even if he bought at a high price (by the way interesting choice in Allentown Mark)
    • 2)If you don’t want to have your view of the market be the primary driving factor the only other way I know of is to have something else few can do or are willing to do. That might be major rehabs, it might be buying with problematic tenants in place or it might be being able to find killer deals. This is almost never the kind of stuff you will find openly listed or that the average Joe can do but there are definitely people doing really well with this and if you buy at the right price the market is only an added benefit if it goes up.
    • 3)You can just get lucky. Sometimes speed, networking etc. can mean you just get a deal. A lot of investors are just constantly around trying to find something. It's a lot of work but being top of mind or just coming upon a deal someone else just didn't get to yet can workout. You are still probably not getting 10% COC but it may mean a decent investment vs. the loads of stuff that are going to those with few requirements.
    2Reply
  • Darwin Crawford
    Rental Property Investor · Scottsdale, AZ · Member since 2016 · 296 posts · 243 votes
    9y

    Geez, you guys/gals really know your stuff!  This is fast becoming one of my favorite threads on BP!

    @Mark A. - one theme that I am seeing here, and that I see a lot of at my day job, is specialized knowledge, and its ability to put an investor at or near the top of his/her competitive pool. 

    It seems like those of the @Llewelyn A. variety are really, really good at underwriting and math. I have been doing this personally and professionally now for the better part of 3 years, and still am not fully there for IRR.

    However, I come from a 15+ year background in construction and management, with a nerd-like focus on efficiency and building technologies.  That is my edge.  Others have theirs in underwriting, or maybe deeper pockets than the rest of us, or a nose for deals, or maybe the advantage of having grown up in a certain area, and knowing everyone.  

    So while the original question seems to have been answered way better than I ever could, I am still a firm believer in "finding your why", (a la Apple Computers) and then relentlessly honing your edge.  What is your background? What do you bring from it that might make a property uniquely suited to you, where you can add value and create wealth because of what YOU are good at. 

    I was able to gain an edge here in Scottsdale due to the building being master-metered, with lots of deferred maintenance, and about as energy-efficient as a screen door on a submarine.  Others passed on the deal, but I went for it, ran my numbers, applied my edge and it's working.  Do I want to leave my office and go repair high-voltage conduit on an Arizona Roof?  Not really, but I can, and do it better than someone who doesn't know how.  Cheaper too.  

    This is just an example, but the MFH space is such a complex beast, and requires so many skills, that if you find your edge, and apply it, you might just land a great deal where you can shine.  

    Also - goes without saying but THANK YOU to all the guru's who weighed in here.  I'm taking notes and putting this on my list to learn.  

    1Reply
  • Sam Shueh
    Real Estate Agent · Cupertino, CA · Member since 2016 · 4k+ posts · 1k+ votes
    9y

    10% cap rate does not happen in most America metropolitan area, May be in Memphis, TN, Jonesboro, AK "C" cities. In my area most buyers pay cash over pay for a duplex for 1M, They gamble on potential rental increase and appreciation. Some use it for depreciation to reduce their tax obligation.  Our area is a 2-3% cap and all sales are over asking price.  This is based on the fact $-mrkt pays <1 % interest. 2-3 is twice or trice that. 

    0Reply
  • Alex CraigBusiness Member
    Real Estate Professional · Memphis, TN · Member since 2009 · 1k+ posts · 1k+ votes
    9y

    @Sam Shueh Jonesboro is in Arkansas, not Alaska. More interesting though is someone outside of the state of AR knowing about Jonesboro. You must have family there, LOL.  I simply can't take anyone serious who compares Jonesboogy to Memphis. Not sure what makes Memphis a "C" city, but there is 11 billion in commercial construction happening right now; pardon me, 11,034,000,000 as Sedgwick Claims Mgmt announced a $34,000,000 expansion that will create 150 more new jobs. No telling how many the other $11,000,000,000 will create. We do have a lot of class "C" and even more class "D", but what else do you expect in a blue collar town driven by blue collar warehouse and transportation type jobs. Avg income last year for us (off the top of my head) for 100 move in's was $4,800 and avg rent is $930. I would say any midwest city is going to have similar profiles.  We have an NBA franchise that is currently ranked #2 best franchise in all of Sports. Not to speak of job creation and tourism through Graceland (2nd most visited house outside of the White House....which could change this year with some of the NE Patriots declining to go, LOL), Beale St, Civil Rights Museum, etc.  All that being said, there is a crime problem, but if you stay away from the low income MF units and large low income MF complexes, you will be fine. That is where most of the crime concentration is.  Unless you have a crack addiction or need to buy a 1/2 ounce of weed, you have no reason to visit those parts.

    http://www.espn.com/espn/story/_/id/13875380/espn-...

    901-848-9028
    5Reply
  • Darwin Crawford
    Rental Property Investor · Scottsdale, AZ · Member since 2016 · 296 posts · 243 votes
    9y

    Also - from WSJ: https://www.wsj.com/articles/banks-retreat-from-apartment-market-1487678401?mod=cx_picks&cx_navSource=cx_picks&cx_tag=poptarget&cx_artPos=4#cxrecs_s

    0Reply
  • Elizabeth Wilson
    Real Estate Investor · Memphis, TN · Member since 2016 · 940 posts · 695 votes
    9y

    @Alex Craig: LOL  "Unless you have a crack addiction or need to buy a 1/2 ounce of weed, you have no reason to visit those parts".

    @Mark A. - This doesn't directly answer your question but thought it was another good expert's thoughts on MF (it's for the Memphis market but I think it is also a nationwide perspective).  From an article I read yesterday in: https://www.memphisdailynews.com/news/2017/feb/20/sector-by-sector-highlights-of-the-commercial-property-forecast-summit/

    Multifamily:

    Tom Grimes, MAA's executive vice president and COO, said that millennials and their tendency to prefer rental properties are partly responsible for an increase in demand.

    “The groups that skew rental housing are growing, and that works in our sector’s favor,” Grimes said.

    Highlights: Growing millennial demographic that prefers to rent, affordability, job growth.

    Forecast: Continued job growth will bring more renters into the market, strong 2016 will carry over, future of Memphis rental market looks strong.

    He said it: “This is the single largest creator in households, and it is the absolute key to apartment rental growth,” Grimes said of the correlation between job growth and rental demand. 

    0Reply
  • Joe Scaparra
    Investor · Austin, TX · Member since 2013 · 680 posts · 1k+ votes
    9y

    I'm one that likes the "Simple Stupid" method. If its not broke don't fix it. It really goes back to what is your goal? Additionally, lets assume that not everyone on this board is a 15 million dollar investor like Liewelyn or someone like Diane who can afford to cash flow negative $12,000 per year, per property, for 3-5 years on the hopes of making money on the sell 10 years later. Good for them, if it works then go for it. Remember a broken clock is still right 2 times a day. For the rest of us "simpletons" cash flow positive is a big deal, especially to newbies in RE. Take advantage of what your market gives. For me, i live in Texas. Texas (Austin) advantage is that 157 net people are moving in the Metro Plex a day, property values compared to the nation are relatively priced low (except in downtown Austin rapidly approaching California pricing), and we still have LOW INTEREST RATES. Rental market is booming. Back to the goal (why), I want to retire someday. I will need predicable, sustainable, income to do that, and the more the better. 1% rule works great for me, here in TEXAS. Been utilizing the 1% since 2002 when I bought my first duplex. It has been a great ride!!!. The BIG REASON multi family RE works is because you can reasonably figure out rental rates before you buy. Looking at history it is hard to find low end rents ($1200 or below) where you might expect a 40-50% decline in rents. Can easily happen in RE prices almost in any market. But low end rentals, especially in population increasing locals have greatly built in protections. Also, if you have strong cash on cash returns you probably are going to experience a good IRR as well. At least with the 1% rule or the ConC return figures your not having to make assumtions of what the market might return. You are using real time numbers. Now don't get me wrong, I'm not saying you should not rule out IRR, its just us simpletons need the cash flow to keep us in the game so we can get that good IRR. One more thought, before 2008 you could buy investment RE with 3-5% down, but no more. Having to put 20% will keep a lot of investors solvent in down times. That alone will keep MF values steady if you are buying with the 1% rule.

    3Reply
  • Charles Worth
    Investor · New York City, NY · Member since 2015 · 808 posts · 417 votes
    9y

    @Sam Shueh

    Assuming there is leverage being used, COC return and cap rate are related but not the same. You can get a 10% COC in a lot of places outside NYC. You can get 10% COC in most MSAs in the U.S., certainly in larger multis.

    @Alex Craig Some of my family if from Memphis and I spent a lot of time there as a kid. While, its probably a good cash flow type market, do you really think it has growth potential in terms of appreciation? 

    0Reply
  • Llewelyn A.
    Investor / Broker · Brooklyn, NY · Member since 2016 · 665 posts · 1k+ votes
    9y

    @Mark A.

    @Joe Scaparra

    @Darwin Crawford

    @Ben Leybovich

    I wanted to demonstrate what you would do if you ONLY learned the 2% Rule. Here is the Example:

    Purchase Price: $100k

    DP: $20k

    Mortgage: $80k, 30 Fixed at 4.50%

    Closing Costs: $5k

    Investment: $25k

    Rents with 2% Rule: $2k per month

    Expenses:

    Expenses
    Prop. Tax 300
    Insurance 100
    W/S 100
    Heating 200
    Electric 100
    Maintenance 300
    Management 200
    Vancancy 300
    Total 1,600

    Cashflow: $400

    CoC = ( $400 x 12 ) / $25k invested = 19.2%

    Here is the SAME example using the Internal Rate of Return:

    Notice that the IRR will take into account the Sales Proceeds over a 10 year period of time. We can also take into Renovations.

    Typically, the IRR will include an Annual Rents and Expense Increases. We can also expand the IRR to include Appreciation (or depreciation depending on your scenario).

    Note that the CoC = 19.2% but the IRR = 13% and is a LOT more Comprehensive.

    So why wouldn't you want to learn this stuff?

    Now, getting back on Topic......

    I typically get an IRR above 10% on these multi-million dollar investments in large Metro areas. But you can't use simple calculations like CoC.

    I'm sure this won't convince the ones who just don't want to understand a more sophisticated calculation, but for those that are open to it, there are really good ways to continue your Real Estate Analysis Education.

    Investor Llew

    2Reply
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