Who is buying in this market?
Most Popular Reply
Real Estate Agent · Washington, D.C. · Member since 2012 · 17k+ posts · 30k+ votes
6yOriginally posted by @Arthur P.:
@Russell Brazil I understand the concept but who is buying at these low returns? You can get into stocks with these returns
Well Im certainly buying and continue to grow rich in doing so. However I wouldnt be buying in all cash. The greatest aspect of real estate investing is using leverage to purchase it. Your return is artificially low in purchasing in all cash.
District Invest Group545 Reviews
133 Replies
@David Klein great comment and points made!! Have to evolve with the market. And true point have to adjust your roi expectations and I have but I’m having a hard time going under 10.
Do you think we can raise from 5% to 10% on a property with all the things you mentioned?
@Mike Dymski I think you’re taking this post personally. We are all trying to learn more. I hope at least. Do you think you can take a 5% and raise it to a 10% property? And I don’t think it’s properties that are undervalued at this rate. It’s just the market and people are buying them. I may be 100% wrong.
Ex. Some properties I have making me 20% turnkey. Fully rented at max rent. I can sell to someone today and get multiple offers at 7% return to them and they will be happy. Is that you?
- Real Estate Agent · Chicago, IL · Member since 2017 · 2k+ posts · 2k+ votes6y
@Tony Kim I agree with you 100%. The people saying returns are low aren't properly calculating their total return. It's easy to get over a 25% IRR right now with todays low rates. IRR as mix of cashflow and mortgage paydown and even very conservative appreciation underwriting at inflation pace.
Buying cash doesn't make much sense in my opinion. It's not even being risk averse as opens you up to increased litigation risks. Lawyers love when a property has no mortgage it gives them a solid asset to go after.
- 6yRyan MoyerBusiness MemberProperty Manager · Orlando Kissimmee Davenport Salt Lake City, Park City · Member since 2019 · 996 posts · 1k+ votes
Originally posted by @Arthur P.:
@Russell Brazil I understand the concept but who is buying at these low returns? You can get into stocks with these returns
Does that matter though? If two investments are generating the same cash return wouldn't you rather have the one that provides an equity return as well?
Cosmic Vacations4.9174 Reviews - Investor · Minneapolis, MN · Member since 2017 · 95 posts · 130 votes6y
Originally posted by @Mike Dymski:
Originally posted by @Arthur P.:
@Mike Dymski the point of the forum is to learn, open our minds and explore more options as I believe real estate has many avenues and an investor goes through different stages as they progress. Been doing this for 20 years and still learning every single day.
You are making statements very boldly but you are not explaining. Unfortunately that does make you sound like a know it all. Explain to me how you are getting 15% on a 5% property?
See prior posts. Buy right, add value, force appreciation, market appreciation, debt, etc. Buy right - Investors are buying properties with a market cap of 5% for less than market value. Add value and force appreciation - Investors are raising rents, reducing expenses, increasing occupancy, and improving operations which drive up NOI, value, and IRR. Market appreciation and debt - self explanatory impact on IRR. I'm repeating the same stuff...not sure what else I can add.
This is pretty basic stuff and Mike has explained it well.
Achieving a 15% IRR on a property purchased at a 5% cap is not difficult if you locate assets that underperform relative to their market potential.
Add value, force appreciation, reduce expenses, and suddenly that asset is worth significantly more than its purchase price. Cap rate becomes functionally irrelevant. @Anthony Vicino nice to join in! Great points. You mentioned undervalued properties and I love them. They have helped me excel very much. My question was not for undervalued properties but turnkey at market rent properties. They are on the market at low return rates. I was just curious who is buying them. Are you? Am I missing something?
- Investor · Northern Virginia · Member since 2019 · 33 posts · 8 votes6y
@Arthur P. from what I've seen, hot markets are flooded with tons of 1031 money and foreign investors who are willing to pay higher prices just to keep their money relatively safe at the moment. I'm with @Russell Brazil, the ROI's your getting aren't as appealing to you because you're paying all cash. In my opinion, that money is better spent as a downpayment for another and another deal as opposed to using all cash to purchase one or two properties. The rates are so low right now so it makes since.
One option, If you buy with cash, then value add, then refi, best case scenario, you can get away with making a 100% ROI in your first year. Then it's all cashflow. Here's another option to make your scenario more appealing, instead of using 100k to buy one property where you might get $1500-1800 in cashflow and a 15-20% ROI, I'd use 20k as a downpayment for 5 properties each bringing in $500-750 in cashflow and with a 30-40% combined ROI. If that's your goal, that could be a real way for you to scale and reach the numbers you prefer. I'd say cap rate is much more so important if you're buying all cash but if you're using leverage IRR or ROI is what I'd day matters because once you make your initial investment back it's all profit from there.
I'm in the DMV market and parts of WV.
- Investor · Minneapolis, MN · Member since 2017 · 95 posts · 130 votes6y
Originally posted by @Arthur P.:
@Anthony Vicino nice to join in! Great points. You mentioned undervalued properties and I love them. They have helped me excel very much. My question was not for undervalued properties but turnkey at market rent properties. They are on the market at low return rates. I was just curious who is buying them. Are you? Am I missing something?
Thanks, Arthur! I'm personally not buying turnkey. Yields don't meet my minimum requirements. Sure it makes sense for somebody out there, though. :)
Originally posted by @Mike Dymski:
Cap rate and return are unrelated (even if buying with cash).
Return comes from cash flow, principal reduction, and appreciation (and tax benefits).
Prices are inflated by artificially low interest rates. If we buy for cash, we pay the high prices without getting the benefit of what caused the high prices (low cost of debt). I am not referring to the cash vs. leverage debate. I'm talking about the total cost of REI (price + the cost of debt).
Many investors are buying and have mid teens for return requirements for passive investments and mid twenties and above for active investments.
Exactly. The biggest nonsense peddled on BP and by Turnkey companies is "high cap rate! 10%! 10% return!" Ughhh, no. High cap rate means lower quality asset, more risk, and more management headache.
Can't believe people still fall for this marketing. The higher the cap rate the quicker I run.
Lately, I have seen 15-18%+ returns on a favorable risk-adjusted basis, investing passively in syndications. Looking to liquidate my active SFH portfolio pronto. Not worth it to deal with tenants and property managers.
- Real Estate Agent · Sisters, OR · Member since 2014 · 1k+ posts · 1k+ votes6y
I recall at @Mike Dymski saying on a forum real estate is to much work for un-leveraged returns. Couldn’t agree more. I also recall @Russell Brazil saying that not taking on debt with interest
rates this low is throwing away a major opportunity, another great point. At the end of the day this is not rocket science buy stuff knowing you can hold it for the long-run. When prices were down I couldn’t afford to buy much because my income was low (but I bought some). Now that prices are high I can’t afford to buy much even though my income is higher (but I am buying some). In 1-5 years you may have bought to high. But in 10-20 years I’ll bet we will all be damn glad we bought solid properties when we did.Don’t wait to buy real estate and wait. Best line ever!
Originally posted by @David S.:
I definitely agree with you on this..."one should either start to pump the brakes on new syndicated investments or truly ramp up their due diligence with high levels of skepticism and standards".
You also mentioned that "IRR of a fourplex I bought last year in South Los Angeles is over 25%...but CoC is just under 8%." This return sounds great...Can you share more details? Was the IRR and COC due to value add on your part? Which neighborhoods of LA are you focusing on?
Hi David, I'm focused on South Los Angeles in areas near or just south of the Coliseum/Exposition Park. Of course, my IRR figure is just an estimate, but I think it's passable based on the fact that I was able to turn over some tenants that were living there 20+ years at very low rent. I rehabbed the units and replaced them with tenants paying market rate (all Section 8). I also got a little lucky in that there was a much bigger building right next to mine that also got purchased and they did a full rehab of the entire building. The area is continuing to change for the better. The competition is still pretty fierce and there are a lot of active flippers in the area so you've got to be patient and persistent.
- Rental Property Investor · CT · Member since 2019 · 105 posts · 68 votes6y
@Arthur P.
Haven't read thru this entire thread, but I just purchased a giant (4700 sq ft) three family brick building that I am BRRRRing. It took me an entire year to find a deal in this market. My COC Returns on my BRRRRs usually range between 80-350%. In this market, however you have to accept lower returns if you want to keep going. This current BRRR will only be around a 50-60% COC depending on the appraisal. There are no comps in this area for a 3 family this size. I am converting each unit to 4 bedroom units. With a two car garage on site that I plan to rent out as well, expected NOI should be around $45k a year.
With the multis, I have found that my biggest competition is amongst owner occupants who are just looking for help with the mortgage from the other units, and can afford to get a mortgage and go way over asking price. I’ve lost out on about 10-15 deals this year because of this. However, with this current building, I got lucky because the seller was smart and knew this building would not qualify for a mortgage (some fire Damage) and did not want to waste his time with an owner occupant bid. I offered cash and got the property $25k under asking price, even though there were a ton of other bids with a financing contingency that were much higher than mine.
I’ve also found that winter is the best time to purchase. Every single one of my 7 properties have been purchased in November/December.
- Specialist · Cleveland, OH · Member since 2018 · 1k+ posts · 666 votes6y
@Arthur P. would never touch a prop with 5, 6 7 % net cap UNLESS I knew for sure it was going to appreciate big time. I only keep props that net 20% per year... 10% ++ are to had if you know where and have a good team
- Multifamily Syndicator · Houston, TX · Member since 2016 · 1k+ posts · 2k+ votes6y
From a global perspective, some investors, in some European countries, believe or not, will love to get 5%!
Remember, investing is not just for making a ton more money, in some instances, it is also hedging against inflation.
- Investor · Monterey, CA · Member since 2019 · 8 posts · 0 votes6y
@Russell Brazil do you use conventional financing for your purchases then? I too believe in the power of leveraging for RE purchasing, but wonder if you hit roadblocks? I bought investment RE years ago and am looking forward to getting back into it.
- Investor · Tx, GA · Member since 2019 · 313 posts · 337 votes6y
Originally posted by @Frank Maratta:
@Arthur P.
Haven't read thru this entire thread, but I just purchased a giant (4700 sq ft) three family brick building that I am BRRRRing. It took me an entire year to find a deal in this market. My COC Returns on my BRRRRs usually range between 80-350%. In this market, however you have to accept lower returns if you want to keep going. This current BRRR will only be around a 50-60% COC depending on the appraisal. There are no comps in this area for a 3 family this size. I am converting each unit to 4 bedroom units. With a two car garage on site that I plan to rent out as well, expected NOI should be around $45k a year.
To clarify, when you say cash on cash, you are only including the X amount you paid for the downpayment and your NOI is Annual Rent - Annual Expense including tax/maintenance, right?
Going through here I wonder if everyone has the same calculations for same terms.
For example
I pay $500,000 for a duplex, 20% down.
Interest on $400k at 4% -- $16,000
Generate $2.4k/month rent per unit, $57,600 a year. Take away 1 month each for vacancy. $52,800
Operating expenses are $10k in tax, $3k in maintenance or fee's. $13k.
NOI - $52800 - $13k - $16k = $23800
Cash paid = $100k
CoC = 23.8k/100k = 23.8%
Is this your general formula?
- Developer · Santa Clarita, CA · Member since 2008 · 15k+ posts · 10k+ votes6y
Originally posted by @Erik W.:
One of the great ways to find better returns is by re-positioning a property to a higher standard (I think someone else mentioned this already) but here I am specifically interest in the lower cost of renovation vs. a new build. Let's take a place I was looking at a few weeks ago as an example. 20 unit apartment with about 1000 sq ft per apartment. Price was $1.1 million. They needed some work, but approximately half of the units had been renovated nicely within the last 1-2 years. It was also in a good location close to employment, services, and attractions. The cost per square foot = $55.
Compare that to brand new builds which are between $120 - $150/sq ft. You can do a lot of rehab on a place and bring it from C+ to B+ or A- with that kind of margin. Let's say you spent $20/sq foot or $400,000 total ($20K per unit) to freshen up & put some sparkle on it. Turn an ugly duckling into a swan and still be in for 1/3 to 1/2 the cost of a new build.
Although I'm getting into multi-family, I also still buy houses I call "little ATMs" too. $30K "all in" and get $600-$650/rent. Cash flow is typically $200-$300/month per door for $30K. That's 8%-12% return on capital, but if you can get into them for nothing then your return is theoretically infinite as well as significant in terms of real dollars when you have several dozen.
This is a good example of the value add play to generate both equity and cash flow although I would disagree with the statement that you can convert any property into an A or B Class. An A class is 10 years old or newer typically and in an A area. You can’t change the age (unless you completely tear down and rebuild) or area.
In my neck of the woods here in a so Cal, you can actually make both plays. Build new is less expensive at times than buying existing to rehab but with the value add model, you can still create equity (although cash flow is no easy task in So Cal).
- Rental Property Investor · CT · Member since 2019 · 105 posts · 68 votes6y
@John Collins
My cash on cash return doesn’t include equity because I do not consider it cash flow. My formula is (gross rents - mortgage payments - expenses) / total invested; all on an annual basis.
For example, my last BRRRR I acquired the property for $100k, put another $100k in repairs into it and it just appraised at $278k.
NOI after debt service is $19,000
Coc = $19,000 divided by total invested: ($200k minus ( $278,000 x 70% LTV = $194,600) = $5,400 ) = 351%
I actually waited 6 months before putting a mortgage on the property and during that time accumulated $15,000 in NOI. So, if you want to include the extra $15,000 I am actually at an infinite return. However I don't account for that in my formula, it's just an added bonus. The goal is to get as much of my initial cash back as possible after the refinance and keep rolling.
- Investor · Monterey, CA · Member since 2019 · 8 posts · 0 votes6y
@Frank Maratta Thank you for your example! These are the purchase price numbers I am looking for. Is your example from your neck of the woods in New Britain, CT? I'm in Monterey, CA - too expensive to obtain cash flow, which I am looking for.
- Property Manager · Windsor Locks, CT · Member since 2016 · 1k+ posts · 1k+ votes6y
Originally posted by @Beth Rosenblum:
@Frank Maratta Thank you for your example! These are the purchase price numbers I am looking for. Is your example from your neck of the woods in New Britain, CT? I'm in Monterey, CA - too expensive to obtain cash flow, which I am looking for.
North Central CT is still pretty strong for cash flow. Deals like what Frank outlined are tough to find with that much spread, and expenses can get out of control quickly if you don't have a great team in place. I hear most of CA doesn't see anything near the 1% rule on the MLS, but we're still seeing above 1% on a lot of our listings out here. Check out Hartford County when you have some time. While I don't necessarily recommend Hartford itself, the surrounding towns are still pumping some decent numbers.
- Investor · Monterey, CA · Member since 2019 · 8 posts · 0 votes6y
@Filipe Pereira Thank you, I will!
- Rental Property Investor · CT · Member since 2019 · 105 posts · 68 votes6y
@Beth Rosenblum
Beth, the one that appraised for $278k is from New Britain. Most of my properties are in New Britain. It’s an excellent area and it has really come up in the last five years.
The current BRRR I have going on right now is in Middletown. It's really a special type of property. It's the biggest 3 family I have ever come across in my life - almost 5000 sq feet. It's a nice brick building that I am converting to three 4 bedroom units. Gross income before I purchased the building was $54k annual. After my rehab, I expect to bring it up to $65k annual. I paid a lot- $176k. I expect to have another $125k into it. So in order to get over a 100% return I need it to appraise at $400k. Yes, $400k. It's truly a unicorn and time will tell what the appraisal ends up coming back at. At a 10 cap it should technically appraise at around $450k, but it's three units so I am still limited to comps. Hopefully the appraiser will consider comps from other towns in this special situation, because there is nothing close to that sold in Middletown.
- Rental Property Investor · CT · Member since 2019 · 105 posts · 68 votes6y
@Filipe Pereira
Yes I agree. The CT economy lags behind the rest of the country, so in 2016 when prices were extremely high in other parts of the country I was able to get in and buy 4 properties in that one year. Once 2018 hit, CT caught up with the rest of the country and made it tough for investors to find a deal with strong cash flow. They’re still out there, but it takes a while to find them. I’ve only been purchasing about one property per year since 2018.
I agree with all your statements - stay away from hartford. Crime rate is too high for most decent tenants to be comfortable with.
And yes, my crew is everything to me. I GC my own jobs and it took me years to get a solid team of subs in place. Once you have them, treat them right. What I do would not be possible without them. A lot of people think they can go and do these rehabs and they're in for a world of surprises when they actually try it and they see guys walking off the job or not even showing up in the first place. In addition, they grossly underestimate rehab costs. I see deals every day from wholesalers on Facebook that make me laugh with their "only needs $25k in rehab" scams. Everyone with a pick up truck and a tool box is a "flipper" nowadays. I don't flip, I BRRR, because I would rather have an asset at the end of the day that pays me passive income than a job. That's what flipping is, a job. And to be successful in flipping, people don't understand you really have to have a great handle on what rehab costs are going to be. It makes sense for the people that have experience and can have 3 or 4 flips going on at one time, but for anyone just getting started and wants to do just one, I would highly, highly reccomend that they rethink that decision. It would make more sense to BRRRR the property for their first one, because when they mess up and under estimate the rehab costs, at least they can hold on to the asset and sooner or later the rent will make them whole again. With that, they have the learning experience, which in my opinion - is worth more than the money they would have made had their flip actually netted them a profit.
It’s a tough market to get started in, but it’s always better sooner than later to get going.
Join the conversationCreate a free account to reply, vote on answers and follow this thread.