Who buys Multi Families w/ 6% Cap Rates

[Emilio Ramirez]

I've been looking at multifamily properties on MLS, backpages, loopnet, etc and applying the 50%/2% rule to them. I've also been looking at the cap rate, cash on cash return, IRR and NPV. On the surface, none of these seem like good deals and don't come close to meeting the 50/2 rule. Many of them seem to be overpriced by 3-400% in order to achieve a 20% cash on cash ROI. What is the game being played here? Do people actually buy these properties at these rates? Is the seller just starting high, knowing that the offers he is going to receive will be lower?

Here's an example of what I'm finding typically.

# Price:$598,000
# No. Units:12
# Building Size:11,520 SF
# Price/Unit:$49,833.33
# Property Type:Multifamily
# Property Sub-type:Garden/Low-Rise
# Property Use Type:Investment
# Construction Status:Existing
# Commission Split:2.5%
# Cap Rate:8%
# Occupancy:100%
# No. Stories:2
# Year Built:1977
# Lot Size:0.57 AC
# Tax ID / APN #4023
# Parking Ratio:17 / 1,000 SF

I understand that is not necessarily the best way to find a bargain purchase, but I am seriously wondering who buys this type of property? And why?

[Kyle K.]

Emelio R,

Many people buy Multi-Families with Cap Rates of 6% and less. In fact, in San Diego you won't find a multi-family with a Cap rate less than 7.5%. Does that mean that no one buys multis in San Diego or that, even worse, anyone that does loses money? Of course not. To say otherwise would be ignorant.

In fact, in another thread, https://www.biggerpockets.com/forums/48-general-real-estate-investing/topics/34916-appreciation-vs-cash-flow-the-clash-of-the-titans-?page=8, I address an example where my company not only increased the value of the multi-family in question, but it also provided positive cash flow.

Now, am I saying that it's easy? Absolutely not. Sometimes the negotiations alone take an extraordinary amount of time. Closing a multi-family usually takes significantly longer than, say, a single family home. However, to those experienced teams that know how to spot a good value and, more importantly, capitalize on that value, the rewards are lucrative. I hope that answers your question!

Kyle