Low Cap 5.75%, but still 40k+ a month, worth the hassle?

15 Replies

I posted a few months ago, about a deal I found on CBRE.  A 400+ high rise.   It caps low, but has a cash flow of in two months compared to my W2 annually.  

Is this an investment that many would pass up?  

I signed a confidentiality form or I would post the financials.

Mark

curious how your planning to attack this one..  

a few of my colleagues own exactly these types of assets..  they tend to have high quality tenants and you can give them to professional management.. so for passive they are very good.

although most on BP would probably think the return is too low.. but if you have the means to buy this then ease of ownership and top shelf clients don't come with 10 caps.

..."if you have the means"...

If your annual W2 is just 2 months of its net rent, it does make us wonder - "if". Good luck!

@Brent Coombs   I was making the assumption that at 80k a year .. that this investor was looking for capital partners and partners to sign on the loans.. 

Originally posted by @Jay Hinrichs :

@Brent Coombs  I was making the assumption that at 80k a year .. that this investor was looking for capital partners and partners to sign on the loans.. 

That's fine, provided that Mark realizes the proceeds are divvied up similarly. Is less than 6% really an acceptable return when you have so many other players in the mix?

Who can't turn their many $100k's of dollars cash into better cash returns? Just sayin'...

I am going to be creative with the purchase. I will know more after the end of the week. This particular one has a 3/4 purchase price assumable loan, and will need to get creative with about 15 mil of the rest and working capital.

Hi Mark. I can't answer your question, as I don't have multifamily. In case it is hassle free, I would go for it. My question is how do you plan to finance it? My understanding is you can take a commercial property loan, which likely will have 25% down payment, and say 5% annual cost. Wouldn't it eat up your cap rate? I consider all these things myself, any whatever property I look at, I don't get proper profit on my cash. 

This post has been removed.

@Mark Holmes what's the goal of buying this property? While the size of the property is large and can be appealing, a less than 6% cap rate is not spectacular for a private investor. Is there some value-add component that you see? Just because $40K/month in cash flow would look great flowing into your bank account (not sure if you're talking about actual cash flow or NOI here), every investor at the scale you're talking about is going to value their return on investment based on some metric that's not just "how many dollars are coming back in"?

If you're planning on raising capital you need to have a serious knowledge of what you're doing.  You should not be trying to raise millions of dollars from people when you aren't able to seriously analyze a deal yourself.  

@Mark Holmes from what you've said I can gather two things:

1. Cash flow isn't out of this world

2. Your income isn't enough to secure a loan on a property this size on your own

That being said, it's likely you'll need a loan guarantor. Have you factored their cut (common to see 2-3% of the loan here for "lending"  you their asset sheet) in to your returns? Surely it'll cut in to your bottom dollar and decrease attractiveness of the opportunity to investors.

Also, as @Matt Lefebvre said, be careful raising private equity. You're stepping in to securities territory there so be sure to consult a securities attorney before making any serious moves.

I'm just curious how you're going to sell the idea to an investor, this is far far far out of my realm here but wouldn't they want to see some kind of track record?

I think @Mark Holmes is talking about the fact that despite the "low" cap rate of 5.75%, the property is bringing in 40k+ a month (emphasis on the amount of monthly cash being generated here).  But with the property costing around 8.5 million +/- 150k, you need to ask yourself (or your investors), with this 8.5 million, is possible to general a higher monthly income of 40k+ a month?( or 50k? 60K?) with other properties?

Originally posted by @Jim Shack :

I think @Mark Holmes is talking about the fact that despite the "low" cap rate of 5.75%, the property is bringing in 40k+ a month (emphasis on the amount of monthly cash being generated here).  But with the property costing around 8.5 million +/- 150k, you need to ask yourself (or your investors), with this 8.5 million, is possible to general a higher monthly income of 40k+ a month?( or 50k? 60K?) with other properties?

Exactly! ie. Why did Mark even mention $40k/m - if he must share that with multiple investors? 

ie. If the current Lender didn't think they could do better - they'd buy it themselves! Cheers...

@Mark Holmes I’m half with @Jay Hinrichs and half with “the field” on this one. I do believe that if you’re looking at a nice 400+ unit high rise you know it’s not a 10-cap. You’d probably (as an investor) be hugely suspicious of it was. So let’s just table the whole 5.75% cap rate thing for now. Let’s assume it’s groovy.

Why would an investor and/or an investment group trust you to quarterback the deal? Heck, I wouldn’t trust me to quarterback the deal and I think I know a decent amount about commercial multifamily. Who knows, maybe not 🤷🏻‍♂️

So I’m not saying you can’t do it, that it’s impossible, or that you would do extremely well. But the crux of this is that you’d better have a stellar track record. If you’re making $80K it’s not like you’ll be able to tell investors you’re dropping $1M in the deal. Unless Auntie Edna recent passed away and left you a trust fund. So now these investors need to trust a lead/sponsor/etc. with infinitesimally small skin in the game.

Okay, that said, I’ve made more than a few assumptions to get to this point. Maybe a great place to start is your background, what capital you have for the deal, etc. I could be all wrong. For all I know you have 200 unit apartment complex that you’ve syndicated already and this is the next logical growth step 🤷🏻‍♂️

I don't know how cap rates that low generate money if traditionallly funded and there is no way to substantially increase revenue. 

If the numbers on the CAP rate are accurate, you're looking at $57,500 of "profit" after expenses for every $1M of real estate purchased. But if you finance, you're likely paying roughly $5k per month for every $1M you purchase. If my math is right, you're netting less than $60k of "profits" and paying right around $60k to the bank.

Some of that is equity, so if IRR only is your goal, you may still be ok (if you like those numbers). If cashflow is a/the goal, it seems to me you have to know you can increase revenue somehow.

Someone please correct me if I'm wrong, I very well may be. I don't play in sandboxes that big (yet :) ).

At a 5.75 cap it sounds like a deal that a REIT would have snatched up if it’s solid.

I’m assuming it’s a value add since they haven’t which complicates the debt stack.

Never hurts to swing for the fences though! That’s how millionaires are made sometimes!

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